I  Overhead  Expense 

I  and 

I  Percentage  Methods 


A  LECTURE  ON 


Henry  F.  Baillet 


Overhead  Expense 

AND 

Percentage  Methods 


A  Lecture  on  the  Cost  of  Doing 
Business,  explaining  how  to  find 
it  and  what  to  do  with  it  when 
found.  With  practical  examples 
of  its  use  taken  from  actual 
business  experiences 

By 
Henry  F.  Baillet 


"If  it  helps  you,  tell  the  other  fellow, 
That  he  also  may  be  helped  ' ' 


NEW  YORK 

DAVID  WILLIAMS  COMPANY 

231-241  WEST  39th  STREET 
1915 


Copyrighted  1915, 

By 
DAVID  WILLIAMS  COMPANY 


PREFACE. 

This  book  owes  its  existence  to  the  fact  that 
almost  every  time  the  lecture  has  been  delivered, 
some  one  deplored  the  fact  that  they  had  not  the 
matter  in  book  or  pamphlet  form  for  future  study. 
On  several  occasions  local  Associations  had  en- 
gaged stenographers  to  take  the  lecture  for  the 
future  benefit  of  their  members. 

However,  such  attempts  proved  futile  for  the 
reason  that  without  some  study  of  the  subject 
matter  no  stenographer  could  furnish  an  intelligent 
result.  Feeling  that  these  occurrences  testified 
unmistakably  to  a  need  for  such  a  treatise  I  have 
put  it  in  book  form,  somewhat  condensed,  but  sub- 
stantially as  delivered,  adding  also  a  compilation 
of  'questions  and  answers  and  other  data.  The 
purpose  that  induced  me  to  go  a  lecturing — in  the 
first  place,  was  a  desire  to  put  the  fundamental 
truths  regarding  Overhead  Expense  and  Percentage 
Methods  into  such  plain  language  that  the  ordinary 
everyday  business  man,  who  graduates  from  the 
ranks  of  the  mechanic  without  any  special  business 
training,  could  easily  understand  them. 

Almost  every  time  the  lecture  has  been  given 
some  elderly  or  old  man  (who  had  spent  practically 
his  whole  life  in  business  without  having  achieved 
a  modest  competency  for  his  old  age)  would  come 
up  and  say: 

"I  wish  I  had  heard  this  thirty  years  ago,  I 
would  be  better  off  now." 

343628 


.-4  .....  .'.I. 


PEEFACE 


For  the  young'  mair  starting  in  business  it  fur- 
nishes the  foundation  for  a  liberal  education  in 
business  arithmetic. 

I  have  been  asked  if,  and  told  that,  I  was  ex- 
ploiting the  Burton  Method  or  the  Burrough's 
Method,  etc.,  etc.  For  a  matter  of  information 
would  say  that  I  find  on  investigation  that  the 
methods  of  proportioning  the  different  factors 
forming  parts  of  a  sale  which  I  use,  are  similar  or 
the  same  as  those  used  by  the  parties  named,  and 
other  writers.  It  is  also  probable  that  I  had  un- 
wittingly absorbed  some  of  their  thoughts  as  I 
have  for  twenty  odd  years  read  every  issue  of  some 
five  or  six  trade  publications. 

However,  so  far  as  the  principles  governing  the 
loss  ratio  and  replacement  ratio  inherent  in  per- 
centage are  concerned,  they  are  as  old  as  numbers. 
My  first  acquaintance  was  made  therewith  in 
1887.  At  that  time  I  was  employed  in  the  Supreme 
Office  of  a  Life  and  Health  Insurance  Association. 
In  getting  out  the  Annual  Report  for  the  New  York 
State  Insurance  Department,  I  tried  to  verify  my 
work  by  percentage  methods.  For  instance,  on 
roll  at  beginning  of  year  age  36 — ?  New  certificate 
written  during  year  age  36 — ?  On  roll  end  of  year 
age  36 — ?  Died  during  year  age  36?  Passed  to  a 
higher  age  during  year?  Came  from  a  lower  age 
during  year — ? 

We  are  not  discussing  insurance  matters  here  and 
I  have  simply  given  the  foregoing  as  an  illustration 
of  what  was  required. 

Now,  in  attempting  to  prove  my  work  by  per- 


PREFACE  5 

centage  methods  I  found  that  having  added  a  cer- 
tain percentage  at  age  36  to  those  already  on  hand 
and  passing  a  certain  percentage  into  a  higher  age, 
as  well  as  bringing  a  certain  percentage  from  a  lower 
age  up  to  age  36  and  other  ages,  I  could  not  make 
things  come  straight  until  I  gave  proper  considera- 
tion to  the  loss  and  replacement  ratios  inherent  in 
percentage  methods. 

In  the  lecture  it  has  been  my  aim  to  make  this 
phase  so  plain  that  no  one  can  misunderstand  it. 

The  facts  and  data  submitted  are  all  based  on 
actual  experiences  in  the  plumbing  and  heating 
business.  However,  the  principles  treated  are  the 
same  in  any  business,  and  the  whole  method  of 
presentation,  etc.,  is  especially  adapted  to  any 
branch  of  the  building  industries. 

Carpenters,  painters,  masons,  electricians,  etc., 
have  about  the  same  problems  as  we  have,  a  little 
different  in  detail,  but  fundamentally  the  same. 
To  all  such  this  treatise  can  be  especially  recom- 
mended. 

In  getting  out  the  synopsis  cards  showing  the 
different  percentages  there  was  nothing  to  guide  me. 
I  do  not  know  of  any  publication  on  business  mathe- 
matics that  has  a  similar  lay  out.  I  found  it  neces- 
sary (in  order  to  compare  different  business  ex- 
periences) to  work  out  this  synopsis  and  may 
therefore  claim  it  as  an  original  proposition.  Stu- 
dents of  the  subject  will  find  it  advantageous  to  go 
still  further  in  this  direction. 

I  want  to  take  this  opportunity  to  thank  those 
men  who  have  so  freely  helped  in  this  work  by  giving 


6  .PKEFACE 

me  a  detailed  statement  of  their  business  and  who 
in  some  cases  have  thrown  their  books  open  for  my 
investigation,  appreciating  very  much  their  con- 
fidence in  the  honesty  of  my  purpose  and  investiga- 
tion. 

I  believe  that  this  is  the  first  time  that  detailed 
data  has  been  gathered  from  actual  experiences  and 
collated  in  just  this  manner.  It  would  have  been 
impossible  of  accomplishment  without  the  aid  of 
these  men. 

The  entire  trade  and  business  world  is  indebted 
to  them. 

If  only  somewhere,  someone  is  benefitted  by  this 
great  amount  of  detail  investigation  extending  over 
a  period  of  four  years  and  not  yet  ended,  I  shall 
consider  that  all  my  endeavors  have  not  been  in 
vain. 

"If  it  Helps  You,  Tell  the  Other  Fellow  that  He 
also  may  be  Helped." 

There  seems  to  be  a  difference  of  opinion  among 
writers  on  business  mathematics  regarding  technical 
terms,  especially  as  to  the  meaning  of  the  terms  net 
and  gross  as  applied  to  costs  and  to  profit.  In  this 
book  gross  is  taken  to  mean — by  large  or  in  the 
rough,  if  you  will.  Gross  cost  meaning  first  or 
superficial  cost,  namely  the  actual  cost  of  labor  and 
material,  those  things  which  the  proprietor  buys 
direct  to  sell  again.  Net  cost  means  the  final  or 
true  cost  namely  labor,  material  and  overhead 
expense.  Gross  profit  likewise  means  the  profit 
on  the  gross  out  of  which  expenses  have  still  to 
be  paid.  Net  profit  means  the  final  or  neat 


PEEFACE  7 

profit,  after  everything  that  is  to  be  added  has 
been  added  and  everything  that  is  to  be  subtracted 
has  been  subtracted. 

This  explanation  is  necessary  as  many  teachers 
and  writers  take  gross  cost  or  profit  to  mean  always 
the  larger  amount  and  net  to  mean  always  the 
smaller  amount.  This  confusion  of  terms  has  re- 
sulted at  times  in  printed  presentations  making  me 
say  just  the  contrary  of  what  I  wished  to  convey. 
While  a  gross  ton  of  coal  is  a  larger  amount  than 
a  net  ton,  it  does  not  follow  that  a  gross  cost  must 
be  a  larger  amount  than  a  net  cost.  If  the  reader 
will  bear  in  mind  that  in  this  presentation  of  the 
subject  the  term  GROSS  always  means  the  first 
cost;  and  the  term  NET  always  means  the  final 
or  neat  cost,  there  will  be  no  confusion  of  thought. 
The  same  applying  to  gross  profit  and  net  profit. 

HENRY  F.  BAILLET. 
Irvington,  N.  J.,  March  1915. 


TABLE  OF  CONTENTS. 
CHAPTER  I. 

PAGE 

Overhead  Expense 9 

CHAPTER  II. 
Percentage  Methods 27 

CHAPTER  III. 

Questions  and  Answers   on  Overhead  Expense  and  Re- 
lated Subjects 49 

CHAPTER  IV. 
Proportioning  Overhead  Expense 76 

CHAPTER  V. 

Comparative    Overhead    Expense    Statements    of    Ten 
Different  Firms 82 

CHAPTER  VI. 

Comparison  of  Overhead  Expense   Statements  of  One 
Firm  for  Several  Years 109 

CHAPTER  VII. 

Value  of  Annual  Synopsis  of  Business 124 


CHAPTER  I. 
OVERHEAD  EXPENSE  AND  PERCENTAGE. 

The  purpose  of  this  lecture  is  not  to  tell  you  what 
percentage  must  or  should  be  figured  as  overhead  or 
what  profit  you  should  make.  It  is  to  call  your 
attention  to  the  necessity  of  knowing  what  over- 
head expense  is,  and  to  try  to  explain  how  to  find 
and  apply  that  knowledge  in  your  business  life. 

In  general  business  lines  attention  was  first  drawn 
to  the  divergence  between  school  methods  of  per- 
centage and  profits  and  the  natural  business  methods 
about  1880. 

Scientific  business  management  and  cost  ac- 
counting as  such  is  a  comparatively  new  study. 
The  factory  with  its  repetition  of  processes,  its 
piece-work  and  its  engross  production  where  the 
clipping  of  one  second  on  two  or  three  operations 
of  several  hundred  employees  makes  a  difference  of 
hundreds  of  dollars  per  week,  of  course,  occupy  a 
position  in  relation  to  cost  account  that  never  will 
or  can  be  approached  in  our  business.  Neverthe- 
less, we  also  have  our  little  problems  along  these 
lines  that  require  our  attention. 

Prior  to  about  1900  the  essays  and  talks  at  our 
conventions  and  gatherings  were  almost  entirely 
devoted  to  sanitary  and  purely  technical  matters. 

The  mercantile  questions  were  not  thought  of. 
Our  members  and  the  trade  in  general  consisted  of 
a  bunch  of  good  mechanics  of  more  or  less  earnest 

9 


10  OVEEHEAD  EXPENSE 

and  more  or  less  honest  sanitarians  but,  as  a  rule, 
of  poor  business  men. 

We  had  spent  our  spare  time  and  money  to  ad- 
vance our  technical  skill  but  had  paid  little  or  no 
attention  to  methods  of  obtaining  a  profit  com- 
mensurate with  our  endeavors. 

In  New  Jersey  the  matter  was  first  publicly 
broached  in  a  paper  on  system  in  the '  plumbing 
business  read  at  the  1904  State  Convention. 

Mr.  Aldous,  of  Passaic,  N.  J.,  in  1908,  took  up 
the  O.  H.  X.  question  with  a  blackboard  talk 
which  was  freely  published  in  the  trade  papers. 

Mr.  Morgan  of  Detroit,  Mich.,  did  the  same  thing 
at  the  Michigan  State  Convention  of  1909. 

This  presentation  was  repeated  at  the  National 
Convention  at  Galveston,  Texas,  in  1911,  and  others 
throughout  the  country  have  done  similar  good 
work  during  the  past  ten  years. 

In  other  lines  of  business  these  questions  have 
been  taken  up  more  or  less  thoroughly  until  at  the 
present  time  almost  every  retail  trade  or  merchant's 
association  is  studying  the  proposition  very 
earnestly. 

Our  various  trade  publications  have  been  full  of 
these  different  problems  now  for  several  years. 
Still  in  spite  of  all  this  publicity,  out  of  forty 
master  plumbers  to  whom  I  had  put  a  point  blank 
question  a  few  years  ago,  only  three  had  gone  into 
the  matter  in  detail  in  their  own  business;  ten  had 
made  a  stab  at  it  in  a  halt  hearted  manner;  a 
number  of  the  remainder  made  a  guess  and  twenty 
never  had  taken  up  the  matter  at  all. 


PERCENTAGE  METHODS  11 

One  of  our  local  younger  members,  to  whom  I 
had  put  the  question£told  me  that  after  a  man  had 
done  contract  work  for  a  little  while  he  would  come 
pretty  d —  near  knowing  whether  he  was  making 
anything  out  of  it  or  not.  "  Gentlemen,  that  is 
about  as  near  as  the  most  of  us  get  to  it."  The  truth 
is  the  most  of  us  don't  know,  some  of  us  don't  want 
to  know.  We  are  jogging  along  fairly  comfortably 
and  are  afraid  to  know  what  we  are  really  doing. 
Now  why  this  apathy  regarding  so  important  a 
matter?  It  is  mostly  carelessness,  largely  lack  of 
knowledge  as  to  how  to  go  about  it  and  foolish  fear 
of  our  inability  to  handle  the  matter. 

One  frequent  excuse  is  lack  of  time  which  is 
purely  imaginary  but  mostly  it  is  a  lack  of  tem- 
peramental inclination. 

We  are  like  a  little  boy  who  coming  home  the 
evening  of  the  first  day  of  school  was  asked  by  his 
father  what  he  had  learned.  He  said,  "Well,  pop, 
I  have  learned  one  thing,  and  that  is  that  I  need  a 
thicker  pair  of  pants." 

The  first  thing  that  strikes  us  when  we  look  this 
question  squarely  in  the  face  is  that  we  also  figura- 
tively speaking  need  a  thicker  pair  of  pants. 

My  purpose  is  to  try  and  show  you  how  easy  it  is 
to  ascertain  and  apply  these  apparently  intricate 
mathematical  calculations.  Now,  please  don't  make 
the  mistake  of  thinking  of  me  as  a  mathematical  sharp 
or  anything  of  that  kind.  I  am  just  an  ordinary 
plumber  like  yourselves  who  has  the  temperamental 
inclination  to  dig  into  things  and  desire  to  help 


12  OVEEHEAD  EXPENSE 

himself  by  helping  others  in  the  trade  to  understand 
these  problems. 

We  have  had  at  various  times  talks  on  these  sub- 
jects by  professional  bookkeepers  and  mathematical 
experts  but  we  do  not  seem  to  understand  their 
language.  It  is  a  great  deal  like  the  lady  who  went 
to  a  fashionable  physician  complaining  of  her 
health.  The  physician,  after  examing  her  said, 
"My  dear  madam,  what  you  need  is  oxygen;  come 
every  afternoon  at  3  o'clock  and  take  an  inhalation. 
It  will  cost  you  five  dollars  per  visit/'  The  lady 
seemed  highly  pleased  and  said,  "There,  I  knew 
that  other  doctor  didn't  understand  his  business; 
he  told  me  all  I  needed  was  a  little  more  fresh  air/7 

What  we  need  is  not  superfine  theoretical  ex- 
positions but  a  little  fresh  air  treatment  of  the 
underlying  principles  regarding  0.  H.  X.  and  per- 
centage methods. 

Now,  in  the  course  of  this  lecture  if  there  is  any- 
thing said  or  pat  on  the  blackboard  that  you  do  not 
thoroughly  understand,  I  wish  you  would  please 
arise  and  ask  questions,  because  so  long  as  there  is 
one  man  in  the  room  who  does  not  understand,  just 
so  long  will  the  results  be  unsatisfactory  to  you  and 
to  me. 

The  illustrations  that  will  be  placed  on  the 
blackboard  are  only  for  the  purpose  of  showing  you 
how;  they  are  not  to  be  taken  as  figures  applying 
to  your  own  individual  business,  although  they  do 
represent  an  average  result  as  existing  under  average 
business  conditions  at  this  time. 


PEECENTAGE  METHODS  13 

Basis  of  Presentation. 

The  illustrations  are  based  on  a  $15,000  annual 
business.  Now,  why? 

The  total  amount  of  business  reported  from  102 
shops  in  New  Jersey  from  a  period  of  one  year,  from 
July  4,  1911,  to  July  4,  1912,  was  $2,784,725.00, 
giving  an  average  of  $27,301.00  per  shop.  How- 
ever, out  of  these  1 02  shops,  60  reported  doing  be- 
tween $9,000.00- $21, 000.00,  therefore,  $15,000.00 
being  the  mean,  seems  to  be  the  average  amount  of 
business  done  by  the  general  run  of  shops  in  New 
Jersey,  and  I  believe,  from  subsequent  reports  that 
it  is  about  the  general  average  of  more  than  one- 
half  the  shops  in  the  Eastern  States.  Western  and 
especially  far  western  shops  seem  to  average  some- 
what higher. 

I  want  to  ask  your  indulgence  for  going  minutely 
into  details  which  is  necessary  in  order  that  we  may 
understand  one  another. 

Someone  has  figured  out  that  the  average  life  of 
a  $10.00  bill  is  ten  months  but  we  do  not  want  to 
jump  at  the  conclusion  that  a  $1.00  bill  will  last  us 
one  month.  Figures  and  averages  are  dangerous 
things  unless  we  understand  just  exactly  what  we 
mean,  why  and  how  we  use  them. 

What  is  Yearly  Business. 

In  looking  at  a  $15,000.00  business  we  should 
have  a  clear  understanding  of  what  we  mean  by  a 
$15,000.00  business.  We  must  have  a  clear  con- 
ception of  what  constitutes  annual  amount  of 
business  done.  In  this  and  other  definitions  I  pro- 


14  OVEEHEAD  EXPENSE 

pose  to  give  you  the  natural  definition  rather  than 
academic  ones,  in  other  words,  use  plumber's 
English. 

As  both  receipts  and  charges  will  overlap  each 
other  from  year  to  year,  in  as  much  as  receipts  of 
one  year  may  be  for  charges  of  the  preceding  year, 
and  as  charges  of  one  year  will  not  become  receipts 
until  the  following  year,  so  we  can  not  take  either 
our  receipts  or  our  charges  as  a  year's  business. 
We  would  take  all  work  done  and  material  handled 
in  your  business,  whether  finished  or  unfinished, 
each  year  bearing  its  own  burdens,  regardless 
whether  the  work  has  been  charged,  paid  for  or 
not  charged  or  never  to  be  paid  for,  as  the  amount 
of  business  done  for  that  year;  in  other  words  the 
amount  of  a  year's  business  is  all  material  and  labor 
used  in  your  shops  during  that  year. 

If  not  chargeable  to  a  customer,  to  a  sale  or  to 
a  job,  it  must  be  charged  to  yourself  or  to  profit  or 
loss.  It  should  appear  in  the  total  amount  of 
business  you  are  doing  if  you  want  to  provide  a 
thick  enough  pair  of  pants. 

What  Constitutes  Overhead  Expense. 

The  next  question  is,  what  constitutes  or  is 
chargeable  to  O.  H.  X.?  Broadly  speaking,  0.  H.  X. 
is  all  expense  or  money  paid  out  which  is  not  di- 
rectly charged  or  chargeable  to  a  customer  or  pro- 
vided for  in  an  estimate  for  contract  work. 

There  are  a  number  of  lists  of  items  that  have 
been  published  during  the  past  few  years  and  which 
are  used  by  men  in  our  trade  who  are  talking  on 


PERCENTAGE  METHODS  15 

this  subject,  some  of  which  you  unquestionably  have 
already  seen  and  gone  over.  I  may,  however,  be 
able  to  show  you  more  of  the  why  and  wherefore. 
For  that  reason  we  will  go  over  the  items  of  a 
similar  list  at  this  time. 

EXAMPLE  No.  1. 

Salary $1375.00 

Rent 240.00 

Light 12.00 

Heat 24.00 

Telephone 48.00 

Horse  and  wagon 360 . 00 

Bookkeeper 520.00 

Insurance 10 . 00 

Taxes,  license 10.00 

Carting,  freight 26 .00 

Carfares 24 .00 

Tools 104.00 

Collections 50.00 

Bad  accounts 75 . 00 

Driver 520.00 

Waste  material 70.00 

Replacing  defective  goods 35 . 00 

Labor  lost 206.00 

Allowances  and  discounts 75 .00 

Interest  on  capital 90 . 00 

Postage 20.00 

Stationary  and  printing 20 . 00 

Association  dues .  .  18 . 00 


$3932.00 

Salary. 

The  first  item  on  our  list  is  salary.  Many  men 
say  why  salary?  The  proprietor  gets  all  the  profit 
there  is,  where  does  he  come  in  for  salary. 

The  fact,  however,  is  that  salary  is  not  profit  and 
for  this  reason,  "  We  can  not  speak  of  profit  until  a 
job  has  been  finished,  charged  and  paid  for";  until 
an  operation  has  been  completed — profit  as  such 
does  not  come  into  existence. 


16  OVERHEAD  EXPENSE 

The  necessity  of  salary  or  cost  of  management, 
however,  comes  into  existence  the  minute  you  open 
your  door  for  business  and  sometimes  even  before 
that.  Therefore,  salary  is  justly  chargeable  to 
O.  H.  X.  and  cannot  be  considered  profit. 

The  next  question  then  arises,  "How  much  is  a 
man  entitled  to  charge  for  salary  in  his  0.  H.  X. 
account?" 

The  professional  accountant  tells  us  just  as  much 
as  he  can  earn  somewhere  else,  or  just  as  much  as  he 
would  be  obliged  to  pay  some  one  else  for  doing 
that  work.  We,  in  the  plumbing  business,  how- 
ever, have  taken  a  more  definite  criterion.  We 
say,  a  master  plumber  is  entitled  to  draw  for  salary 
at  least  as  much  as  he  pays  a  journeyman  plumber, 
because  if  he  was  not  engaged  as  a  master  plumber, 
he  could  earn  that  amount  as  a  journeyman  plumber, 
therefore,  we  put  the  item  at  $1,375.00  per  year, 
which  in  my  home  city  is  what  we  pay  a  journey- 
man plumber;  $5.00  per  day — 44  hours  in  a  week 
and  50  weeks  in  a  year.  In  other  words  it  means 
that  it  will  pay  your  salary  and  you  can  go  home 
Saturday  afternoons  and  take  two  weeks'  vacation 
in  the  summer  without  pay.  This,  we  feel,  is  the 
lowest  sum  a  self-respecting  master  plumber  should 
allow  for  in  his  0,  H.  X.  account. 

If  a  master  plumber  works  with  the  tools  part  of 
the  time,  that  part  of  the  time,  which  is  charged  to  a 
customer  or  provided  for  in  an  estimate,  is  not 
0.  H.  X.  For  example: — A  man  working  half  of 
the  time  with  the  tools  would  charge  half  of  his 
time  as  productive  labor  and  half  as  0.  H.  X. 


PEKCENTAGE  METHODS  17 

Rent. 

The  next  item  is  rent  which  we  put  down  at 
$20.00  per  month  or  $240.00  per  year.  This  is 
about  the  lowest  rate  which,  in  my  home  city,  one 
could  hire  a  place  for,  fit  to  do  a  $15,000.00  business. 

Often  men  will  say,  "Why,  I  don't  pay  any 
rent.  I  own  the  place"!  If  a  man  owns  the  place 
in  which  he  does  business  he  is  entitled  to  charge 
his  0.  H.  X.  account  with  just  as  much  rent  as  he 
could  obtain  by  hiring  the  place  to  some  one  else. 
Using  it  himself  debars  him  from  letting  it  thereby 
depriving  him  of  that  revenue,  therefore  the  business 
is  justly  chargeable  with  that  item. 

If  you  want  to  be  exact,  you  can  take  the  valua- 
tion at  5%,  add  thereto  the  expenses  of  upkeep, 
taxes,  insurance,  etc.  This  will  give  you  the  actual 
cost  to  you  as  a  rental.  Rent  in  some  form  or  other 
you  do  pay  whether  you  rent  from  another  owner 
or  own  and  rent  from  yourself. 

Light. 

Light  we  put  down  at  $1.00  per  month  or  $12.00 
per  year.  Of  course,  some  of  my  friends  have  said, 
"We  do  not  keep  open  at  night,  we  use  hardly  any 
light. "  But  they  forget  the  many  evenings  they 
sit  at  home  figuring  estimates  on  work  or  making 
out  bills.  Therefore,  considering  that  as  an  expense 
to  the  business,  $12.00  a  year  is  very  light  for  light. 

Heat. 

Heat  we  put  down  at  $24.00  which  would  buy 
four  tons  of  coal  at  $6.00  a  ton. 


18  OVERHEAD  EXPENSE 

Telephone. 

Telephone  at  $48.00  per  year.  That  is  the  lowest 
rate,  we  in  my  home  city,  can  hire  a  telephone  for 
business. 

Horse  and  Wagon. 

Horse  and  wagon  we  put  down  at  $30.00  per 
month  or  $360.00  for  the  year.  That  represents 
the  cost  of  board  for  a  horse,  horse  shoeing  and 
light  repairs  to  vehicle.  It  does  not  provide  for 
replacements. 

Bookkeeper. 

A  bookkeeper  we  will  put  down  at  $10.00  per 
week  or  $520.00  per  year.  I  do  not  mean  that  you 
should  not  pay  more  than  $10.00,  nor  do  I  mean 
$10.00  a  week  is  a  sufficient  sum  for  a  first-class 
accountant.  I  do  know,  however,  that  a  majority  of 
our  people  do  their  own  bookkeeping,  have  their 
wives  or  families  do  their  bookkeeping,  or  hire  lads 
or  misses  at  $5.00  or  $6.00  a  week.  Therefore,  I 
am  putting  it  down  at  $10.00  a  week  as  an  average 
pay. 

Now,  there  is  one  phase  of  this  bookkeeping 
question  that  I  want  to  call  your  attention  to, 
because  I  feel  keenly  on  the  subject. 

Many  of  us  take  our  children  into  the  business 
and  expect  them  to  help  us  without  remuneration. 

Sometime  ago  when  speaking  on  this  subject  in  a 
small  town,  one  of  the  gentlemen  objected  to  the 
list  of  items.  He  said,  "I  do  not  have  all  those 
expenses.  My  boy  who  goes  to  school  keeps  my 
books,  that's  good  enough  for  a  plumbing  shop." 


PEECENTAGE  METHODS  19 

I  asked  him  what  he  paid  the  boy,  and  his  answer 
was,  "Pay  him  nothing.  He  gets  all  he  wants  to 
eat  and  plenty  of  clothes  and  a  dollar  to  spend  once 
in  a  while." 

Another  one  of  the  members  of  the  local  Associa- 
tion who  heard  this  conversation  wrote  me  a  few 
weeks  afterward,  saying  that  his  boy,  who  chummed 
with  the  son  of  the  member  spoken  of  previously, 
had  asked  him  about  the  bookkeeping  proposition 
for  his  father,  and  the  answer  was,  "  Yes,  I  take  care 
of  the  old  man's  books  and  I  take  care  of  the  old 
man's  business  and  you  can  bet  your  boots  I  take 
care  of  myself." 

Now,  here  is  a  man  who  is  making  a  thief  of  his 
own  son  because  he  did  not  have  gumption  enough 
to  obtain  a  price  for  his  work  which  would  enable 
him  to  hire  the  bookkeeping  done.  If  you  gentle- 
men want  to  make  thieves  of  your  sons  and  some- 
thing worse  of  your  daughters,  just  ask  them  to 
help  you  in  your  business  for  the  clothes  on  their 
back  and  the  food  that  goes  into  their  stomach,  and 
if  in  after  years  they  break  your  hearts  and  your 
bank  accounts,  you  have  nobody  to  blame  but 
yourselves. 

If  you  need  the  help  of  your  families  well  and 
good,  but  pay  them  at  least  what  you  would  have  to 
pay  someone  else.  It  is  enough  to  sacrifice  your 
own  life;  don't  sacrifice  your  family  as  well. 

Insurance. 

The  next  item  is  insurance.  We  do  not  include 
liability  insurance  which  under  the  present  em- 


20  OVERHEAD  EXPENSE 

ployees7  compensation  act  is  vitally  necessary; 
simply  cover  a  little  fire  and  vehicle  insurance 
which  we  figure  at  $10.00  per  year. 

Taxes  and  License  Fees. 

Taxes  and  license  fees  we  will  put  down  at  $10.00 
a  year.  It  has  been  said  to  me  often,  "Why  taxes 
are  personal  matters.77  True,  but  if  you  are  a 
working  man,  you  will  have  to  pay  perhaps  $1.00 
poll  tax.  As  soon  as  you  have  a  business  your  per- 
sonal tax  is  raised  according  to  what  they  think 
your  business  is  worth;  in  other  words,  being  in 
business  occasions  the  tax,  therefore,  the  tax  is 
chargeable  as  an  O.  H.  X.  of  the  business. 

Freight  and  Cartage. 

The  next  item  is  freight  and  cartage  which  we 
put  down  at  $26.00  per  year  which  is  simply  what 
it  would  cost  to  hire  an  extra  horse  one-half  day 
each  week. 

Carfare. 

Carfare  we  put  down  at  $24.00  a  year.  Often 
men  have  said  to  me,  "That  is  too  much/7  but  when 
they  have  investigated  a  little  more  closely  it  is  too 
little.  It  is  one  of  those  small  things;  we  put  our 
hands  in  our  pockets  and  pass  out  the  nickels  and 
the  dimes  not  thinking  of  the  amounts.  But  if  you 
will  place  a  certain  amount  of  money  in  a  separate 
envelope  and  pay  only  carfares  from  this  sum,  you 
will  soon  find  that  $24.00  a  year  is  a  very  low  esti- 
mate for  carfares  on  a  $15,000.00  business. 


PERCENTAGE  METHODS  21 

Tools. 

Tools,  loss,  wear  and  tear  we  put  down  at  $2.00 
per  week  or  $104.00  per  year. 

Collections. 

This  means  such  moneys  as  you  can  not  collect 
personally  or  easily,  which  you  will  have  to  give  to 
a  collector  or  a  lawyer,  and  we  are  figuring  this  at 
3/100  of  1%  which  amounts  to  $50.00  per  year. 

Bad  Accounts. 

Bad  accounts  which  means  those  that  you  do  not 
collect  at  all,  we  put  down  at  Hi%  or  $75.00  per  year. 

You  remember  well  the  lady  who  came  to  your 
place  in  an  automobile  and  told  you  that  she  was 
tired  of  having  Sam  Jones  and  Dick  Brown  do  her 
work  because  their  work  was  entirely  unsatisfactory, 
that  she  was  recommended  to  you  as  being  a  first- 
class  mechanic,  and  that  she  was  going  to  give  you 
all  her  work.  This  sounded  very  good  to  you  and 
you  thought  you  were  going  to  get  a  good  customer. 
You  did  about  $300.00  of  work  for  her  and  you 
haven't  been  paid  yet  and  probably  never  will  be. 
You  have  those  kind  and  so  do  I,  and  every  other 
man  in  this  room.  Those  are  bad  accounts. 

Driver. 

We  will  give  the  driver  as  much  as  the  bookkeeper 
which  is  $520.00  per  year. 

I  am  well  aware  of  the  fact  that  a  majority  of 
our  people  do  not  employ  a  driver.  They  drive  their 
own  horse  or  have  a  boy  drive.  But  you  must  re- 


22  OVERHEAD  EXPENSE 

member  that  when  you  get  up  at  5  o'clock  in  the 
morning,  do  your  own  hostler  work,  drive  your 
horse,  put  him  in  the  stable,  you  certainly  should 
figure  more  than  a  44-hour  week  on  the  first  or 
salary  item,  because  you  are  working  nearly  70 
hours. 

You  are  simply  using  a  $5.00  per  day  man  to  do  a 
$10.00  per  week  man's  work. 

Waste  Material. 

This  means  odds  and  ends,  split  pipe,  broken 
fittings,  etc.,  which  we  put  down  at  1%  of  $7000.00 
or  $70.00. 

The  summer  before  last  as  I  was  looking  after 
some  work  a  distance  away  from  our  shop,  running 
along  in  our  machine,  I  saw  a  new  building  in  the 
course  of  erection  and  some  men  came  out  of  the 
cellar  and  started  to  throw  things  at  a  couple  of 
dogs  across  the  street.  One  of  these  things  struck 
the  machine  and  I  found  that  it  was  a  %-inch  gal- 
vanized fitting. 

The  men  on  the  job  did  not  have  to  pay  for  them 
but  it  was  an  expensive  luxury  to  the  boss,  to  throw 
money  at  fighting  dogs.  This  is  one  way  of  wasting 
material. 

Replacing  Defective  Goods. 

Replacing  defective  goods  is  one  item  that  always 
makes  us  hot  under  the  collar.  Why  in  the  name  of 
good  common  sense  a  master  plumber  should  pay 
for  the  defects  and  shortcomings  of  not  only  himself 
and  his  own  employees  but  also  for  the  manu- 


PEECENTAGE  METHODS  23 

facturer,  the  supply  dealer  and  the  jobber  all  the 
way  up  and  down  the  line,  seems  almost  unex- 
plainable.  However,  the  conditions  of  the  present 
day  make  it  so  that  we  have  to  shoulder  the  re- 
sponsibility. Even  if  the  supply  man  does  make 
good  the  fixture,  the  cost  of  putting  in,  let  alone  the 
ill  will  of  your  customer,  you  have  to  suffer.  When 
we  place  this  item  at  J^  of  1%  of  $7000.00  which  is 
$35.00  per  year  we  make  it  a  low  estimate  on  a 
$15,000.00  business. 

Labor  Loss. 

You  send  a  man  out  in  the  morning  with  three 
or  four  small  jobbing  slips.  He  comes  back  at 
noon  and  he  has  done  perhaps  one  job  out  of  the 
four.  In  one  of  the  other  places  there  was  nobody 
home;  in  the  other,  the  lady  was  washing  and  would 
not  have  the  fire  dumped  and  at  the  third  the  lady 
did  not  know  whether  he  was  a  peddler  or  tramp 
and  would  not  let  him  in.  You  have  those  things 
and  so  do  1. 

Then  again  in  contract  work  you  spend  a  day  or 
more  getting  the  material  ready  for  the  job.  You 
send  a  man  on  the  job  and  he  decides  that  he  can 
not  or  will  not  use  a  fitting  you  have  sent  and  he 
sits  down  to  read  the  paper  until  the  boy  goes  back 
to  the  shop  to  change  the  fitting— MORE  LABOR 
LOST. 

Then  again  your  supply  house  sends  goods  direct 
on  the  job,  they  tell  you  that  they  have  shipped 
them;  you  send  your  man  on  the  job  to  find  that 
they  have  not  sent  the  material.  They  sit  down 


24  OVERHEAD  EXPENSE 

to  wait  for  material   or  orders — MORE  LABOR 
LOST. 

So  if  we  figure  5%  on  3  inens'  wages  per  year  it 
will  make  $206.00  a  year  for  LOST  LABOR. 

Allowances  and  Discounts. 

You  all  know  what  that  means.  The  lady  where 
you  put  in  the  last  bath-tub  saw  a  scratch  on  it 
but  she  said  nothing  until  you  presented  the  bill 
and  then  she  politely  told  you  that  she  would  not 
pay  the  price  of  a  first-class  tub,  but  if  you  would 
deduct  $5.00  from  the  price,  she  would  pay  the  bill. 

Of  course,  you  do  not  wish  to  take  this  to  court 
and  you  take  the  bill  less  $5.00. 

Or,  that  tank  valve  which  you  put  in  for  your 
neighbor  started  leaking  from  a  lead  chip.  He,  of 
course,  told  you  nothing  of  that  until  his  bill  had 
been  presented.  The  time  for  your  man  going  there 
to  make  it  good  is  an  allowance  which  you  feel  you 
must  give. 

Those  are  a  few  of  the  many  things  for  which  you 
make  allowances  and  allow  discounts  on  your  bills. 

For  this  we  estimate  one-half  of  1%  of  a  year's 
business  or  $75.00. 

Interest  on  Capital. 

The  next  question  that  arises  is:  "What  is 
capital"?  Capital  invested  in  your  business  is  the 
value  of  your  stock  of  merchandise,  your  tools, 
fixtures,  horse,  wagon  and  equipment,  plus  the 
amount  of  your  outstanding  accounts  due  and 
payable  to  you  plus  the  amount  of  cash  on  hand  and 


PERCENTAGE  METHODS  25, 

in  the  bank;  minus  what  you  owe  for  supplies  or 
other  things  connected  with  the  business. 

On  this  you  surely  should  be  able  to  figure  a  3% 
interest,  because,  if  this  were  not  invested  in  your 
business,  you  could  put  it  in  a  savings  bank  and  re- 
ceive at  least  3%  onfit.  By  having  it  tied  up  in 
your  business  you  can  not  invest  it  elsewhere,  there- 
fore your  business  should  bear  the  interest  charges. 

If,  as  sometimes  happens  to  many  of  us,  you  are 
obliged  to  put  a  note  in  the  bank  for  which  you  pay 
a  discount  fee  or  interest,  this  is  also  chargeable  to 
the  interest  account  as  it  simply  means  capital 
beyond  your  means  which  you  had  to  borrow  for 
your  business. 

We  put  this  down  at  3%  on  $3000.00  or  $90.00  in 
Ihis  case. 

Postage,  Stationery  and  Association  Dues. 

Postage  at  $20.00  and  stationery  at  $20.00  re- 
quire no  explanation.  Association  dues  we  put 
down  at  $18.00  per  year.  In  some  associations 
they  pay  as  low  as  $12.00  and  some  in  my  home 
state  as  high  as  $36.00  per  year.  So  we  will  strike 
an  average  of  $18.00  and  I  will  say  that  this  is  the 
cheapest  tool  that  you  find  in  a  plumbing  shop. 

Considering  your  association  membership  as 
part  of  your  business  equipment  you  will  find 
nothing  that  gives  you  so  large  a  financial  return 
if  you  will  properly  use  it  as  your  membership  in 
Master  Plumbers'  Association. 


26  OVERHEAD  EXPENSE 

Now,  there  are  other  items,  such  as  advertising, 
charity,  replacement  of  horse  and  wagon  and  ma- 
chinery; soft  soap  and  other  incidentals  which  we 
will  not  include  in  this  list  simply  because  we  do 
not  wish  to  swell  the  total  unnecessarily.  These 
items  you  must  add  as  you  find  them  in  your  busi- 
ness. 

The  list  as  it  stands  foots  up  $3,932.00. 


CHAPTER  II. 
PERCENTAGE  METHODS  AND  THEIR  APPLICATION. 

We  find,  therefore,  that  $3,932.00  is  a  conservative 
O.  H.  X.  on  a  $15,000.00  business. 

How  to  Find  Percentage  of  O.  H.  X. 

What  percentage  does  this  represent? 

In  finding  percentage  it  always  gives  us  a  clearer 
view  of  what  we  want  if  we  put  it  in  the  shape  of  a 
fraction.  For  instance:  $3,932.00  is  what  per- 
centage of  $15,000.00? 

We  put  it  in  the  shape  of  a  fraction  and  divide 
the  upper  figure  by  the  lower. 

EXAMPLE  No.  2. 
3932  21 

15000) 3932. 0000(. 2621  or  26  100% 
30000          


93200 
90000 

32000 
30000 

20000 
15000 

5000 

21 

We  find  that  this  represents  26 — %  of  a  year's 

100 

business. 

27 


28  OVERHEAD  EXPENSE 

The  first  two  places  to  the  right  of  the  decimal 
place  in  the  answer  are  or  signify  per  cent,  the  next 
two,  hundredth  of  per  cent. 

If  a  quotients  runs  to  the  left  of  a  decimal  point, 
the  figures  to  the  left  are  100%. 

For  instance: 

2.621 

This  would  read  262—%. 
10 

The  answer  is  not  dollars  or  cents,  but  it  is 
per  cent. 

In  this  discussion  we  want  to  be  absolutely  con- 
servative, so  we  will  make  still  another  cut  and 
assume  that  a  $15,000.00  business  operates  under  a 

21 

25%  0.  H.  X.,  instead  of  26—%    as    our    lesson 

100 

shows,  and  I  believe  that  25%  is  about  the  mean 
average  of  a  business  of  that  size. 

Please  remember  it  may  not  be  your  individual 
percentage.  Your  percentage  may  be  higher  or  it 
may  be  lower.  However,  if  you  do  about  $15,000.00 
business  and  find  that  your  O.  H.  X.  runs  con- 
siderably below  25%,  I  would  advise  you  to  go 
over  your  figures  carefully  to  see  what  you  have 
forgotten. 

If  on  the  other  hand  you  run  quite  some  over 
25%,  I  would  advise  that  you  use  your  pruning 
shear,  as  you  are  under  a  bigger  expense  than  your 
business  will  bear. 

Assuming  that  25%  is  the  0.  H.  X.  on  the  business 
under  scrutiny,  of  what  use  is  this  knowledge  to  us? 


PEECENTAGE  METHODS  29 

How  can  we  apply  it  or  how  can  we  apply  the 
knowledge  of  our  own  individual  expense?  Let  it 
be  what  it  may.  Its  value  is  its  use  in  estimating 
what  our  work  is  worth,  and  as  a  help  to  avoid 
doing  business  for  less  than  cost. 

On  the  Nature  of  Percentage. 

In  using  percentage  as  a  tool  to  work  with,  we 
should  have  a  plain  understanding  of  what  per- 
centage is,  a  plain  conception  of  the  nature  of  the 
tool  we  are  handling. 

Percentage  is  here  used  as  a  standard  of  com- 
parison for  amounts,  as  a  thermometer  is  a  standard 
of  comparison  for  temperatures  and  a  2-foot  rule  a 
standard  of  comparison  for  lengths.  As  we  compare 
lengths  by  inches  and  temperatures  by  degrees,  so 
we  can  compare  amounts  by  percent  or  hundredths. 
Percentum  means  100  parts  or  lOOths. 

One  amount  compares  with  another  amount  ac- 
cordingly, as  each  contains  a  less  or  a  greater  num- 
ber of  lOOths,  just  as  one  temperature  compares 
with  another  temperature  according  as  it  contains  a 
greater  or  less  number  of  degrees,  or  as  one  length 
compares  .with  another  length,  as  it  contains  a 
greater  or  less  number  of  inches. 

Percentage  in  itself  is  not  a  wonderful  wizard 
that  does  things.  It  is  simply  used  as  a  yard  stick 
for  figures. 

It  is,  however,  a  double  barrelled  weapon.  If 
you  use  the  wrong  barrel,  it  kicks. 

Now  what  is  it  that  tangles  up  so  many  of  us  in 
attempting  to  handle  percentage? 


30  OVEEHEAD  EXPENSE 

Is  it  not  due  to  the  fact  that  we  mix  up  discount 
with  percentage  and  apparently  a  further  fact  that 
percentage  can  be  and  is  estimated  on  and  off 
just  as  well  as  percentage  of. 

EXAMPLE  No.  3. 

$100.00  at  50%  off  gives  us  $50.00. 
$  50.00  at  50%  on  gives  us  $75.00. 

It  takes  100%  on  to  bring  the  $50.00  back  to  the 
original  $100.00,  although  it  takes  only  50%  off  to 
reduce  the  original  $100.00  to  $50.00. 

Taking  up  the  matter  of  figuring  price-list  cost  we 
must  remember  that  discount  is  not  percentage 
although  percentage  is  used  in  figuring  discount. 
This  is  not  absolutely  necessary.  In  some  lines  of 
trade,  flat  discounts  of  $1.00  per  dozen  or  $3.00  per 
case  are  in  vogue. 

To  illustrate  the  replacement  ratios  of  per- 
centage: An  article  is  listed  at  $18.00 — 40%  off. 
We  figure  $18.00  minus  40%  equals  $10.80.  Now 
if  we  should  attempt  to  make  our  selling  price  by 
adding  40%,  we  obtain  $10.80  plus  40%  equals 
$15.12  and  not  $18.00.  Neither  do  we  obtain  the 
original  figure  by  adding  60%,  as  $10.80  plus  60% 

on 

equals  $17.28  and  not  $18.00.     It  will  take  66—% 
to   replace    the   40%   impairment   because    $10.80 

A7 

plus  66—%  equals  $18.00. 
100 

Probably  the  clearest  illustration  of  this  proposi- 
tion is  offered  by  the  experience  of  one  of  our 
members. 


PEECENTAGE  METHODS  31 

A  real  estate  agent  for  whom  Jack  did  considerable 
work  demands  10%  discount.  Jack  soon  found 
that  he  could  not  afford  to  pay  this  out  of  his  own 
pocket  as  some  of  the  work  was  pretty  close.  He, 
therefore,  adds  10%  here  and  there  on  the  bills. 

One  month  the  bills  just  happened  to  foot  up 
$100.00  even;  Jack  adds  the  usual  10%  and  sends 
in  a  statement  of  $110.00.  The  real  estate  man 
happened  to  be  in  funds  and  in  the  next  mail  Jack  re- 
ceives a  check  for  $99.00.  He  could  not  under- 
stand where  the  other  $1.00  had  gone  to.  He 
brought  his  problem  to  the  association  meeting  and 
when  put  on  the  blackboard  it  looked  something 
like  this : 

EXAMPLE  No.  4. 

$100.00+10%  =$110.00 
$110.00—10%=$  99.00 

There  was  nothing  wrong  with  the  mathematics. 
The  trouble  was  that  Jack  did  not  make  any  provi- 
sion for  the  percentage  impairment. 

Jack  now  adds  12%  and  the  blackboard  illustra- 
tion looks  like  this : 

EXAMPLE  No.  5. 

$100.00+12%  =$112.00 
$112.00— 10%  =$100.80 

To  be  mathematically  exact  it  would  be  necessary 
to  add  11%.  For 


32  OVERHEAD  EXPENSE 

EXAMPLE  No.  6. 

11 
$100.00+11 —  %  =$111.11 

100 
$111.11— 10%  =$100.00 

There  are  tables  published  showing  these  re- 
placement ratios  in  full.  I  simply  went  into  this 
matter  to  show  you  the  underlying  facts  upon  which 
such  tables  are  based  and  to  impress  upon  you  the 
why  and  wherefore  of  the  method  of  fixing  a  selling 
price  which  I  am  going  to  explain;  also  to  show  you 
the  snare  we  must  always  look  out  for  in  figuring 
percentages;  in  measuring  by  percent. 

Discount  is  percentage  off,  something  taken 
away. 

Expense  is  percentage  of  or  a  part  of. 

Profit  is  percentage  of  or  a  part  of  a  sale  or 
business  transaction. 

Is  this  entirely  clear? 

The  Application  of  this  Information. 

A  fixture  is  bought  for  $18.00  net,  at  what  price 
should  this  article  be  sold  to  yield  a  living  profit, 
assuming  that  15%  is  a  living  profit.  Now  mind 
you  I  am  not  saying  that  you  should  or  ought  to 
make  15%  profit.  That  depends  entirely  upon  the 
character  and  amount  of  your  business  and  your 
personal  valuation  of  your  services.  We  simply 
use  15%  as  an  illustration  because  the  average  of  a 
business  life  is  according  to  a  recent  magazine  article, 
twenty-four  (24)  years.  That  is,  taking  1000  busi- 


PERCENTAGE  METHODS  33 

ness  men  as  they  go,  990  are  either  dead  or  out  of 
business  in  twenty-four  years. 

Fifteen  per  cent  on  a  $15,000.00  annual  business 
for  24  years  will  yield  $54,000.00,  which  at  3% 
saving  bank  interest  will  bring  $1620.00  per  year. 
This  one  can  consider  a  competency  for  old  age  with 
its  infirmities  and  curtailed  earning  powers. 

We  will  simply  use  15%  as  an  example  because 
15%  net  during  our  productive  period  will  yield 
a  competency  when  our  powers  wane. 

Popular  Errors  in  Figuring. 

We  will  first  illustrate  the  method  of  a  man  who 
knows  nothing  about  his  0.  H.  X.  and  probably 
cares  less. 

He  figures  15%  profit  because  he  thinks  that  is 
what  others  are  asking  or  just  because  he  thinks 
15%  is  about  right. 

He  will  figure  something  like  this: 

EXAMPLE  No.  7. 

Cost  of  fixture $18.00 

Labor  and  material . , 15 .00 


First  cost  or  gross  cost $33 . 00 

Add  15%  of  $33.00 4.95 

Total $37.95 

Sale  price $40.00 

He  will  probably  say,  I  will  make  it  $40.00  even 
and  think  he  has  cleared  15%  and  a  little  something 
besides  for  a  good  smoke. 

Now  let  us  see  what  has  really  happened ; 


34  OVERHEAD  EXPENSE 


EXAMPLE  No.  8. 

Cost  of  fixture. $18.00 

Labor  and  material 15 .00 

O.  H.  X.  25%  of  $40.00 10.00 


Net  cost  .......................  $43.00 

Sale  price  ......................  40.00 

Net  loss  .......................  $3  .00  or 

of  the  sale 


And  the  Larger  the  Job  the  Greater  the  Loss. 

Now  let  us  take  the  case  of  a  man  who  knows 
that  he  has  an  0.  H.  X.  to  pay  but  does  not  know 
how  to  apply  that  knowledge  correctly.  He 
estimates  : 

EXAMPLE  No.  9. 

Cost  of  fixture  ..................  $18.00 

Labor  and  material  .............  15  .00 

O.  H.  X.  25%  of  $33.00  .........  8.25 

Profit  15%  of  $33.00  ............  4.95 


Total $46.20 

Sale  price $48.00 

He  will  probably  say  make  it  $48.00  even  and 
feel  sure,  absolutely  sure  he  cleared  at  least  15%. 
Now  let  us  see  what  has  happened  in  this  case: 

EXAMPLE  No.  10. 

Cost  of  fixture $18.00 

Labor  and  material 15 . 00 

O.  H.  X.  25%  of  $48.00 12.00 

Net  cost $45.00 

Sale  price 48.00 

Net  profit $3.00 

which  is  6—%  of  the  sale  and  not  15%. 


PEECENTAGE  METHODS  35 

Now  the  question  is  how  should  this  job  have 
been  figured  to  yield  a  net  profit  of  15%  on  the 
operation,  assuming  25%  O.  H.  X. 

I  am  here  reminded  of  a  little  incident  I  wit- 
nessed some  time  ago  while  waiting  for  a  car  at  the 
D.  L.  &  W.  Railroad  Station  in  Newark. 

A  train  came  in  from  a  suburban  town;  a  fashion- 
able lady,  well  dressed,  came  down  the  steps  from 
the  depot;  passed  an  Italian  candy  and  fruit  store 
where  an  old  Italian  lady  was  sweeping  the  side 
walk.  It  was  a  wet  and  very  mushy  morning  and 
the  spattering  from  the  broom  ornamented  the 
lady's  silk  dress.  She  became  quite  vexed  and 
started  to  berate  the  sweeper.  The  old  Italian 
woman  putting  her  entire  weight  on  the  broom 
and  looking  up  at  the  lady  said,  "Why  you  go  in 
front  of  the  broom,  why  you  no  go  back  of  the 
broom,  you  fool"? 

It  is  up  to  us  in  this  proposition  to  get  behind  the 
broom. 

We  have  been  ornamented  by  the  spatters  long 
enough. 

The  first  thing  we  must  get  hold  of  and  tie  fast  to 
is  that — 

The  sale  price  represents  100%. 

A  Correct  Method. 

To  figure  by  percent  intelligently  we  must  have 
somewhere  something  that  represents  100%  and 
that  is  the  whole  or  the  finished  article.  In  this 
case  the  SALE  PRICE. 


36  OVEEHEAD  EXPENSE 

When  you  attempt  to  figure  any  part  thereof  as 
the  whole,  as  100%,  you  get  into  deep  water,  you 
lose  your  footing  and  soon  are  hopelessly  flounder- 
ing. 

Of  course,  it  is  possible  to  sub-divide  the  sale 
price  and  add  percentages  on  parts  thereof,  uniting 
them  again  and  then  estimating  the  profit  on  the  re- 
united entity. 

This  I  say  is  possible,  but  it  is  not  practical  for 
the  average  small  business  man  nor  is  it  practical 
for  the  average  master  plumber.  Even  then,  the 
whole,  the  result  is  the  only  thing  in  the  entire 
equation  that  represents  100%.  All  component 
parts  are  measured  as  lOOths  of  this  100%. 

Is  this  Entirely  Clear? 

EXAMPLE  No  11. 

O.  H.  X.  representing 25% 

Profit  representing 15% 

We  account  for 40% 

The  other  factor  or  gross  cost  represents ....     60% 

Total  or  sale  price 100% 

The  gross  cost  or  first  cost  $33.00  being  60%  of  the 
sale  price  which  sale  price  is  entire  amount  or  100%. 

The  rule  is: 

Divide  the  amount  of  gross  cost  by  the  percentage 
it  represents.  The  answer  will  be  the  sale  price. 

Divide  the  Amount  of  the  Gross  Cost  by  the 
Percentage  it  Represents. 


PEECENTAGE  METHODS  37 


EXAMPLE  No.  12. 

$33.00-7-  60%  =$55.00 

.60)$33.00($55.     is  the  selling  price  of  the  job 
300 

300 
300 


Now  how  do  we  know  that  this  is  correct? 

A  method  to  be  a  value  must  be  susceptible  of 
mathematical  proof.  Now  we  will  prove  this 
proposition. 

EXAMPLE  No.  13. 

Gross  cost  60%  of  $55.00. .  .        .   $33.00 

O.  H.  X.      25%  of  $35.00 13 . 75 

Profit  15%  of  $55.00 8 . 25 


Total 100%  $55.00  sale  price 

This  selling  price  provides  a  profit  ol  15%  and  an 
O.  H.  X.  of  25%. 

This  method  is  absolutely  correct,  whether  it  is 
a  $1.50  job  or  whether  it  is  a  million  dollar  job, 
although  we  might  be  satisfied  with  less  than  15% 
on  the  million  dollar  job. 

In  delivering  this  lecture  I  have  asked  for  original 
figures  from  the  audience  and  have  worked  them  out 
on  the  blackboard,  so  they  could  see  how  this 
method  worked  out  in  their  cases. 

Twenty-four  inches  makes  2  feet.  Taking  a 
2  foot  rule  as  the  whole,  as  100%,  if  we  turn  down 
50%  of  that  rule  we  have  12  inches  left.  If  we 
add  50%  of  the  12  inches  by  turning  up  the  next 
section  of  6  inches,  we  have  18  inches  and  not  the 
2  feet  we  started  with.  We  will  have  to  turn  up 


38  OVERHEAD  EXPENSE 

both  6-inch  sections  thus  adding  100%  before  we 
get  our  original  24  inches. 

When  a  physician  asks  for  a  10%  triturate  of 
morphine  he  does  not  mean  10%  of  morphine  added 
to  100%  of  vehicle,  but  he  does  mean  10%  of  mor- 
phine and  90%  of  vehicle. 

The  scientists  do  not  make  any  mistake  in  esti- 
mating or  designating  an  amount  by  percentage. 

The  ultimate  result,  in  our  case  the  selling  price, 
is  100%  or  the  whole.  All  component  parts  thereof 
are  represented  by  lOOths,  by  percentages  of  the 
whole. 

There  is  nothing  in  the  entire  equation  that 
represents  100%  excepting  the  selling  price.  There- 
fore, all  percentage  computations  are  correctly 
based  on  the  selling  price. 

There  are  other  correct  methods  besides  the  one 
we  are  recommending  but  there  is  no  other  so  simple 
and  there  is  no  other  simple  method  so  correct  as 
the  one  we  are  explaining. 

Basis  of  Examples  Given. 

The  job  we  have  been  illustrating  is  one  that  is 
taken  from  an  early  period  of  my  business  life  when 
I  thought  that  my  O.  H.  X.  was  about  13  to  15%, 
figuring  as  I  did  at  that  time,  that  getting  a  profit, 
I  was  not  entitled  to  any  salary. 

It  was  a  day  work  job  and  as  entered  on  my  old 
day  book  looks  like  this: 


PERCENTAGE  METHODS  39 


EXAMPLE  No.  14. 

Cost  Charged 

One  I.  E.  lavatory $18.00  $27.00 

Time  and  help 5.25  8.10 

Material..                                        9.75  20.90 


Total $33.00        $56.00 

I  suppose  I  thought  I  made  a  profit  of  $23.00  or 
73%  gross  which  I  concluded  ample  to  cover  my 
0.  H.  X.  and  leave  about  60%  net. 

Now  let  us  see  what  really  happened : 

EXAMPLE  No.  15. 

Gross  or  first  cost $33.00 

O.  H.  X.  25%  of  $56.00 14.00 


Net  cost $47.00 

Sale  price 56 .00 

Net  profit $9.00 

or  16  4/5%  of  sale  and  not  60% 

So  that  instead  of  having  a  60%  net  profit  the 
entire  net  profit  was  a  little  over  16%. 

If  I  had  charged  my  customer  100%  on  the  gross 
cost,  the  price  would  have  been  $66.00.  I  would 
have  cleared  $16.55  or  25%  net  on  the  operation. 

Now  we  will  prove  this  proposition: 

EXAMPLE  No.  16. 

Gross  cost  50%  of  $66.00 $33 .00 

O.  H.  X.    25%  of  $66.00 16.50 

Profit         25%  of  $66.00 16.50 

Total. . .  .100% $66.00 

So  if  your  customer  accuses  you  of  high-way  rob- 
bery, extortion  and  all  the  crimes  in  the  decalogue 


40  OVERHEAD  EXPENSE 

because  you  charged  him  double  what  you  pay  for 
a  %-inch  gas  fitting,  you  can  honestly  and  truth- 
fully tell  him  or  her  that  they  do  not  know  what 
they  are  talking  about,  because 

EXAMPLE  No.  17. 

WhenO.  H.  X.=25% 

100%  added  to  gross  cost  will  yield  25%  net  profit 

or 
If  you  want  to  obtain  25%  net  profit,  you  must 

add  100%  to  gross  cost. 

It  is  about  time  we  wake  up  and  get  on  the  job  and 
do  our  figuring  in  the  proper  manner. 

Value  of  Knowledge  of  O.  H.  X. 

My  object,  as  stated  in  the  beginning,  was  to 
show  you  how  to  handle  this  proposition  of  O.  H.  X. 
and  profit  percentage,  not  telling  you  what  your 
O.  H.  X.  is  nor  what  profit  you  should  get  or  estimate 
to  obtain.  Those  are  things  each  man  must  find  out 
and  decide  for  himself. 

The  underlying  thoughts  are: 

First,  that  we  should  know  what  proportion  our 
0.  H.  X.  is  of  the  business  we  do,  so  we  can  provide 
for  sufficient  expense  loading  to  cover  this  item. 

Second,  that  we  should  use  such  methods  of 
estimating  contract  work  as  will  reasonably  assure 
us  of  the  percentage  of  profit  we  estimate  or  expect 
to  obtain  therefrom,  be  it  2%  or  20%. 

Third,  that  we  should  know  how  much  and  what 
percentage  of  profit  we  are  really  receiving  from  our 
business,  in  justice  to  ourselves,  our  families,  our 
customers  and  our  supply  dealers.  In  short,  to  use 


PEECENTAGE  METHODS  41 

every  means  that  will  help  us  to  know  instead  of 
guessing. 

Since  beginning  this  educational  work  I  have  re- 
ceived a  number  of  men's  figures  of  their  last  year's 
business. 

I  would  be  glad  to  receive  such  figures  from  any 
of  you.  Just  send  me  the  information: 

Total  amount  of  business. 

Amount  expended  for  0.  H.  X. 

Amount  expended  for  productive  labor. 

Amount  expended  for  merchandise. 

I  will  work  out  the  percentages  and  give  you  a 
clean  statement.  It  is  yours  for  the  asking,  al- 
though it  would  be  better  for  you  if  you  worked  this 
out  yourself. 

Some  Actual  Experiences  Compared. 

The  comparison  I  am  now  going  to  put  on  the 
blackboard  is  that  of  three  actual  business  ex- 
periences. 

It  is  a  very  interesting  comparison  as  it  shows 
what  different  results  are  arrived  at  using  practi- 
cally the  same  tools  to  work  with. 

It  also  shows  the  principal  that  we  have  been 
studying  to-night,  as  applied  in  finding  out  what  a 
year  of  endeavor  has  been  brought  forth. 

I  have  on  file  a  large  number  of  such  cases.  I 
selected  these  three  because  they  are  practically 
identical  in  general  surroundings  and  because  I 
personally  know  the  men  whose  business  they  repre- 
sent and  know  that  these  are  absolutely  true  state- 
ments of  straight  plumbing  business. 


42 


OVERHEAD  EXPENSE 


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PERCENTAGE  METHODS  43 

The  first  thing  that  attracts  our  attention  is  that 

No.  1  made  a  loss  of  4—%  with  an  overhead  ex? 

65 

pense  of  only  20  — %  while  No.  2  made  a  profit  of 
100 

17 
5%%  with  an  O.  H.  X.  of  21—%  and  No.  3  with 

an  O.  H.  X.  of  nearly  26%  made  a  net  profit  of 

n 

11—%,  showing  that  it  is  not  always  the  lowest 

0.  H.  X.  that  brings  forth  the  biggest  profit. 

We  are  all  inclined  to  feel  that  when  we  can 
work  with  a  low  O.  H.  X.  that  we  can  do  work 
cheaper  for  our  clients.  The  consequence  is  that 
we  give  away  what  belongs  to  us  in  the  way  of 
added  economy. 

No.  1  with  $4,600.00  of  productive  labor  spends 
$7,500.00  for  merchandise;  No.  2  with  $4,500.00 
productive  labor  spends  $8,000.00  for  merchandise, 
showing  that  in  these  two  cases  practically  the  same 
character  of  work  was  done. 

The  facts  bear  this  out  as  both  of  these  gentlemen 
do  a  mixed  business  of  which  a  good  portion  is  new 
work. 

No.  3  on  the  other  hand  with  $4,828.00  of  produc- 
tive labor  charged  used  only  merchandise  amounting 
to  $4,630.00.  This  gentleman  does  absolutely  no 
new  work;  his  work  is  all  jobbing. 

The  0.  H.  X.  of  No.  1  amounts  to  $2,995.00  who 
made  a  loss  while  No.  2  who  made  a  profit  has  an 


44  OVEEHEAD  EXPENSE 

O.  H.  X.  of  $3,599.00  and  No.  3  an  0.  H.  X.  of 
$3,873.00. 

There  is  less  than  $1,000.00  difference  between  the 
highest  and  the  lowest  amount  in  a  year's  expense 
for  0.  H.  X. 

There  is,  however,  a  large  difference  in  the  amount 
of  gross  profit  added  to  first  or  gross  cost. 

83 
No.  1  added  $2,400.00  which  means  19j^%- 

No.  2  added  $4,500.00  which  means  36%. 

No.  3  added  $5,532.00  which  means  58J^%. 

It  is  plainly  to  be  seen  from  all  the  figures  that  it 
is  not  the  low  0.  H.  X.  that  makes  profit.  It  is  the 
amount  or  percentage  added  to  first  cost  that 
governs  O.  H.  X.  as  well  as  the  amount  of  business 
done. 

The  proof  of  the  above  tables  is  in  Table  19  (see 
page  45) 

This  we  illustrate  simply  to  show  that  this 
method  of  illustrating  a  year's  business  is  sus- 
ceptible of  proof.  That  it  is  based  on  correct 
principles. 

In  order  to  show  the  influence  of  the  amount 
added  to  gross  cost,  we  will  take,  for  instance  case 
No.  1,  who  added  less  than  20%  and  contrast  it 
with  the  same  business  if  he  had  added  36%  and 
also  case  No.  2  what  would  have  happened  to  him  if 
he  had  added  20%. 


PEECENTAGE  METHODS 


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PEECENTAGE  METHODS  47 

Where  Does  Your  Business  Stand. 

Now  there  is  no  need  of  asking  which  of  these 
categories  you  would  like  to  fit  under. 

None  of  you  gentlemen  would  like  to  be  in  the 
same  business  as  in  case  No.  1. 

The  question  is  where  does  your  business  now  fit 
under. 

It  is  up  to  you  to  find  out  and  if  you  are  in  the 
wrong  pew,  get  out  just  as  quickly  as  you  can  and 
get  aboard  the  train  that  is  headed  for  success  on 
the  road  marked  scientific,  safe  and  sane  business 
methods. 

Just  a  few  more  figures  of  general  interest. 

The  reports  alluded  to  previously  from  (102) 
shops  showed  a  total  amount  of  business  done — 
$2,784,725.00  of  which  jobbing  was  $1,027,921.00 
and  new  construction  work  $1,756,804.00. 

Assuming  that  the  jobbing  cleared  as  per  our 
example,  15  to  20%  and  that  new  work  showed  a 
loss  of  from  5  to  7%  as  in  our  example.  This 
would  leave  the  trade  in  general  as  a  whole  with 
about  6%  annual  net  profit  which  is  not  sufficient 
to  keep  us  from  want  should  we  be  fortunate  or 
unfortunate  enough  to  outlive  our  average  span 
of  twenty-four  years  in  business  life. 

Another  view,  there  were  in  1913,  38,978  master 
plumbers  listed  in  Boyd's  Dispatch  as  worthy  of 
business  connections  in  our  country  and  of  these 
4,937  or  12J^%  are  credited  as  being  worth  $5,000.00 
or  over;  87}/£%  are  not  worth  as  much  as  $5,000.00. 
After,  in  a  great  many  cases,  a  life  time  devoted  to 


48  OVERHEAD  EXPENSE 

the  business,  they  closed  their  business  career  by 
death  or  otherwise,  often  not  only  being  worth 
less  than  $5,000.00  but  too  often  owing  their 
source  of  supplies  and  leaving  their  families  in 
want. 

In  a  vast  majority  of  these  cases  I  venture  to  say 
that  it  is  because  they  do  not  know  the  mercantile 
or  business  end. 

I  thank  you  gentlemen  for  your  attention  and 
only  hope  that  the  talk  this  evening  may  have 
thrown  just  a  ray  of  light  on  the  proposition  of 
O.  H.  X.  and  percentage  methods. 


CHAPTER  III. 
QUESTIONS  AND  ANSWERS. 

At  almost  every  gathering  at  which  this  lecture 
has  been  given  there  have  been  very  pertinent 
questions  raised  which  were  answered  by  the 
lecturer,  often  with  the  assistance  of  some  of  the 
audience.  The  questions  and  answers  here  given 
are  some  of  those  raised  on  these  occasions  which 
tend  to  elucidate  phases  not  covered  by  the  lecture 
proper  but  pertinent  to  the  subject  thereof. 

Concerning  List  Prices  and  Discounts. 

Question — I  have  here  a  pamphlet  issued  by  a 
manufacturer  which  illustrates  a  closet  combination 
at  $24.00  list.  The  discount  quoted  to  the  trade 
is  20%.  What  is  the  lowest  price  I  can  sell  this  at 
to  come  out  whole,  leaving  a  profit  out  of  considera- 
tion? My  overhead  is  about  23%. 

Answer— $24.00— 20%  =  $19.20  first  or  gross  cost. 
100%— 23%  0.  H.  X.=77%  represent- 
ing $19.20. 

Divide  $19.20  by  77%  =  $24.93  net  cost. 
Question — There  are  24  closets  on  a  job  I  am  now 
doing,  the  architect  and  owner  want  to  substitute 
these  particular  closets  as  advertised  and  expect 
that  they  should  be  figured  in  the  final  adjustment 
at  no  more  than  the  list  price.  Where  do  I  get  off 
at? 

49 


50  OVEEHEAD  EXPENSE 

Answer — You  get  off  with  a  net  loss  of  24  times 
93  cents  which  is  $22.32. 

Question — What  can  I  do  in  a  case  of  this  kind? : 
The  printed  list  price  is  $24.00,  that  is  the  sale 
price  made  by  the  manufacturer.  I  cannot  very 
well  tell  the  owner  and  architect  that  that  is  wrong. 

Answer — That  depends  entirely  upon  the  wording 
of  the  original  specification  forming  a  part  of  your 
contract.  If  the  contract  or  specification  does  not 
state  specifically  that  fixture  may  be  changed  at  the 
will  of  the  owner  and  that  such  changes  shall  be 
adjusted  upon  list  prices,  you  can  absolutely  refuse 
to  make  any  change  and  insist  upon  the  original 
contract.  Otherwise  you  must  stand  the  loss. 
My  way  would  be  to  estimate  the  closets  at  a 
slight  net  profit  and  quote  the  architect  and  owner 
that  price  as  a  condition  of  changing  the  outfits; 
telling  them  the  truth,  namely:  "That  I  cannot 
afford  to  furnish  those  goods  at  list  price/7  And  I 
certainly  would  inform  the  manufacturer  that  under 
his  present  list  and  discount  I  cannot  afford  to  handle 
his  goods. 

Concerning  Percentage  Added  and 
Results  Thereof. 

Question— If  my  0.  H.  X.  is  25%  and  I  add  35% 
to  the  cost  of  labor  and  material  what  will  my  net 
profit  be? 

Answer — The  tables  given  on  our  cards  do  not 
cover  this  contingency  and  as  I  do  not  believe 
there  are  many  men  present  who  have  been  able 
to  remain  at  school  long  enough  to  soak  up  algebra 


PERCENTAGE  METHODS  51 

we  will  endeavor  to  find  a  way  that  is  understandable 
to  all  here. 

We  will   assume   that   labor   and   material   cost 
$100.00. 

$100.00+35%  =$135.00  sale  price. 

O.  H.  X.=25%  of  $135.00  =  $33.75 +$100.00  =  $133.75  net 
cost. 

$135.00— $133.75  =$1.25  net  profit. 

92 
$1.25^  $135.00  =  .0092+  or  approximately  —  %  profit. 

100 

Now  we  must  prove  this  to  know  that  we  are 
right. 

O.  H.  X.  =25       %    of  $135.00=     $  33.75 

92 
Profit        =       -%    of  $135.00=  1.242 

100 
8 
First  cost  =  74 — %    of  $135.00=       100.008 

100 


100%  $135 . 00  sale  price 

Question — I  thought  I  would  get  10%  for  an 
answer  and  do  not  yet  fully  understand  why  not. 
Will  you  please  figure  out  what  the  profit  would  be 
if  I  added  40%? 

Answer — 

First  cost  $100.00+40%  =$140.00  sale  price. 
O.  H.  X.  =25%  of  $140.00  =  $35.00. 
O.  H.  X.  =$35.00+$100.00  =$135.00  net  cost. 
Sale  price  $140.00— $135.00  =  $5.00  net  profit. 

$5.00-^1140.00  =  .0357  or  3%  profit. 


52  OVEEHEAD  EXPENSE 


Now  for  the  proof: 

O.  H.  X.  =25       %    of  $140.00=  $35.00 

57 
Profit  =  3 %  of  $140.00=  4.998 

100 

43 
First  cost  =  71 — %  of  $140.00=  100.002 

100 


100%  $140. 00  sale  price 

The  reason  you  do  not  get  10%  as  an  answer 
when  you  add  35%  nor  15%  when  you  add  40% 
is  because  of  the  impairment  ratio  in  percentage 
on  and  off  as  explained  in  the  lecture.  Percentage 
on  is  one  thing,  percentage  off  is  another. 

$100.00 +40%  =$140.00 
$140.00—40%  =$84.00  and  not  $100.00. 

Regarding  Results  of  Differing  Conditions. 

The  next  two  questions  were  asked  at  different 
times  and  in  different  cities,  in  fact,  they  crop  up  in 
some  form  or  other  almost  every  time  the  lecture  is 
given.  They  concern  the  opposite  poles  of  one  and 
the  same  question,  therefore,  the  one  answer  can 
well  serve  for  any  and  all  questions  concerning  this 
particular  phase  of  business  experience. 

Question  No.  1 — Many  of  our  people  imagine  that 
because  they  do  their  own  bookkeeping,  look  after 
their  horse  and  attend  to  the  chores  themselves 
they  have  a  very  low  overhead  expense.  Now 
judging  from  the  returns  you  have  gathered  is  this 
a  fact  or  not? 

Question  No.  2 — Is  it  not  a  fact  that  a  man  doing 
a  large  business  has  a  considerably  smaller  com- 


PERCENTAGE  METHODS  53 

parative  overhead  expense  than  one  doing  an  aver- 
age or  a  small  business.  The  so-called  fixed  charges 
such  as  rent,  office  help,  light,  fuel,  etc.,  do  not 
increase  with  a  considerable  increase  in  business. 
Does  this  not  tend  to  make  a  lower  percentage  of 
overhead? 

Answer — There  is  no  definite  rate  of  0.  K.  X.  as 
applicable  to  certain  size  businesses.  The  returns 
that  I  have  gathered  show  however  a  well  defined 
line  of  cleavage  although  individual  cases  "jump 
the  fence"  quite  frequently.  The  small  man,  so 
called,  who  does  his  own  chores  and  often  a  large 
part  of  his  customer's  work  personally,  naturally 
has  a  smaller  amount  of  0.  H.  X. 

He,  however,  can  do  only  a  limited  amount  of 
business  which  makes  his  percentage  of  0.  H.  X. 
climb  up  greatly.  If  we  consider  the  tendency  of 
men  in  this  category  to  work  at  very  low  prices 
because  they  think  that  they  have  a  very  low  over- 
head we  find  that  the  customer  is  getting  all  the 
benefit  that  may  accrue  therefrom  and  the  master 
plumber  is  workingjiis  head  off  for  the  benefit  of 
the  public.  On  the  average  I  find  that  the  per- 
centage of  O.  H.  X.  in  this  category  runs  quite 
some  higher  than  25%. 

On  the  other  hand  the  tendency  of  the  man 
doing  a  larger  than  ordinary  business  is  to  require 
more  comfort  for  himself.  As  the  remuneration 
from  his  business  increases  or  rather  as  larger 
operations  result  in  a  larger  amount  of  cash  passing 
through  his  hands,  he  feels  that  he  wants  more 


54  OVERHEAD  EXPENSE 

leisure;  more  of  the  business  luxuries  and  he  will  as  a 
rule  require  better  shop  facilities,  better  horses  and 
wagons,  better  tools  and  more  office  help.  He 
also  is  inclined  to  take  bigger  chances,  so  that  he 
carries  a  larger  financial  burden  in  the  way  of  notes 
and  discounts  for  his  customers.  He  also  usually 
demands  a  larger  salary  for  himself  than  the  smaller 
business  man. 

As  a  matter  of  fact  the  individuality  of  the  man 
himself  is  the  dominent  factor  governing  the  raising 
or  lowering  of  the  0.  H.  X.  percentage  arising  from 
a  larger  or  smaller  field  of  operation. 

From  a  tabulation  of  twenty  cases  ranging  from 
$4,000.00  to  $125,000.00  amount  of  annual  business 
I  find  that  below  $10,000.00  the  average  O.  H.  X. 
ran  from  35  to  24%.  From  $10,000.00  to  $20,000.00 
the  average  indicated  runs  from  25  to  20%.  From 
$20,000.00  to  $50,000.00  the  average  figures  are 
20  to  15%  and  above  that  the  averages  figure  out 
18  to  13%.  In  no  case  on  which  I  have  been  able 
to  obtain  authentic  figures  has  the  0.  H.  X.  been 
lower  than  13%  of  the  year's  business  and  this 
only  in  one  case  out  of  the  twenty. 

Although  it  is  only  fair  to  say  that  out  of  some 
forty  cards  tabulated,  individual  cases  varied  con- 
siderably from  these  averages. 

This  shows  forcibly  how  necessary  it  is  for  every 
man  to  find  out  his  own  0.  H.  X.  and  not  to  figure 
on  any  average  estimated  by  some  one  else.  That 
is  guess  work. 


PERCENTAGE  METHODS  55 

Regarding  Work  Taken  on  Percentage 
Basis. 

Question — I  did  a  job  last  summer  for  a  large 
manufacturing  concern  on  a  10%  basis.  The  firm 
paid  all  material  bills  monthly  and  furnished  the 
money  for  the  pay  roll  weekly.  All  I  had  to  do  was 
to  check  up  the  pay  roll  every  week  and  check  up 
the  bills  for  material  which  was  all  done  on  the  job. 
I  claim  that  inasmuch  as  I  had  no  carting  or  any 
other  expenses  and  inasmuch  as  my  time  weekly 
for  as  many  hours  as  I  spent  on  the  job  was  included 
in  the  payroll,  I  had  absolutely  no  overhead  expense 
on  the  job  and  my  percentage  was  a  net  profit  of 
10%  on  the  cost  of  the  job.  Am  I  right? 

Answer — This  job  is  one  that  not  only  paid  10% 
on  the  cost  of  the  operation  (not  of  the  job),  but 
through  the  manner  in  which  it  was  carried  out 
lowered  your  overhead  percentage. 

How  much  was  your  last  year's  business  in- 
cluding this  particular  job?  About  $18,000.00. 

How  much  did  this  job  cost  without  your  per- 
centage? 

About  $4,000.00. 

How  much  was  your  last  year's  0.  H.  X.? 

About  $3500.00. 

Your  total  year's  business  was  $18,000.00;  your 
O.  H.  X.  $3500.00;  your  overhead  percentage  was 

44 
therefore  19 — %.     If  you  had  not  received  that 

job  your  0.  H.  X.  for  the  year's  business  would  have 
been  25%.    So  your  having  that  job,  lowered  your 


56  OVERHEAD  EXPENSE 

56 

percentage  of  overhead  expense  for  that  year  6 — %. 

1UU 

I  want,  however,  to  call  your  attention  to  the  fact 
that  it  did  not  lower  the  amount  of  your  overhead  by 
one  penny,  only  the  percentage. 

Furthermore,  you  would  not  be  justified  in  bas- 

44 
ing  your  overhead  loading  for  this  year  at  19 — %. 

Because  that  particular  job  was  really  an  unusual 
influence.  Unless  your  line  of  business  is  such  that 
this  is  a  usual  method  with  you  it  were  wiser  to 
eliminate  this  job  from  your  0.  H.  X.  computations. 
Consider  it  as  outside  of  your  business. 

While  the  fact  that  you  were  paid  for  your 
personal  time  supervising,  directing  and  doing  the 
clerical  work  for  this  job  puts  it  in  a  class  by  itself, 
you  did  probably  have  some  overhead  in  the  nature 
of  carfares,  wear  and  tear  on  tools,  such  as  stock, 
dies,  cutters,  etc.,  that  was  probably  balanced  by 
that  portion  of  your  time  which  the  firm  paid  for 
directly,  not  being  chargeable  to  your  0.  H.  X. 
account.  This  fact,  that  you  were  paid  for  all  time 
you  spent  on  and  with  the  job,  turned  what  would 
have  been  an  unprofitable  operation  into  a  profit- 
able one.  Without  this  proviso  10%  would  not 
have  been  a  profitable  loading.  It  would  simply 
have  helped  to  lower  the  overhead  percentage  for 
that  year,  which  in  itself  does  not  create  profit. 

The  next  questions,  while  asked  at  prior  times 
and  in  different  cities,  throw  more  light  on  a  similar 
phase  of  business  conduct  and  are,  therefore,  given 
here. 


PEBCENTAGE  METHODS  57 

Question — Some  of  our  people  take  work  at  a 
very  small  margin  during  times  of  slack  business, 
claiming  that  so  doing  is  better  than  have  nothing 
to  do,  as  it  at  least  helps  pay  some  of  the  running 
expenses.  Do  you  consider  that  this  is  good  busi- 
ness practice? 

Answer — That  depends  entirely  upon  whether  or 
not  the  man  knows  exactly  what  he  is  doing  and 
knows  precisely  how  far  he  can  go  in  this  direction 
without  harming  his  business.  There  are  times 
when  this  practice  seems  justifiable  and  good 
business.  The  danger  is  that  a  man  is  very  apt 
to  make  this  thought  a  habit.  The  tendency 
then  is  to  load  up  with  unprofitable  work  to  the 
extent  that  he  cannot  handle  profitable  work  when 
it  comes  along.  It  has  an  unquestionable  tendency 
to  lower  his  standard  and  with  it  the  standard  of 
his  competitors.  The  safe  way  is  never  to  take 
any  job  even  during  a  period  of  business  depression 
that  does  not  carry  at  least  enough  margin  to 
cover  the  overhead  expense  and  to  do  that  only 
in  a  limited  number  of  cases. 

As  stated  before :  "It  is  only  good  business  practice 
when  you  know  just  exactly  what  you  are  doing  and 
how  far  you  can  go." 

Question — In  this  city  a  great  deal  of  work  is 
being  done  on  a  percentage  basis.  In  fact,  I  can 
say  that  almost  all  the  larger  work  is  done  under 
these  conditions,  usually  on  10%.  Can  you  show 
us  here  if  this  is  profitable  and  if  not,  why  not? 


58  OVERHEAD  EXPENSE 

Answer — That  depends  entirely  upon  the  in- 
.  dividual  contract.  If  you  mean  that  it  is  to  be 
based  on  10%  being  added  to  the  bare  cost  of  labor 
and  material  without  any  other  item  being  provided 
for,  then  it  is  always  at  a  loss  and  for  this  reason; 
We  will  say  a  man  does  a  large  volume  of  such 
work  and  thereby  keeps  down  his  overhead  per- 
centage, say  to  20%. 

A  job  we  will  say  cost  $2000.00  for  labor  and 
material.  He  receives  therefore 

$2000.00+10%  =$2200.00 

The  job  has  cost  him  $2000.00+20%  of  $2200.00 
=  $2640.00. 

$2640.00— $2200.00  =  $440.00  net  loss. 

If  the  percentage  of  profit  is  allowed  him  on  the 
sale  price  he  comes  off  somewhat  better. 
As  then  it  should  be  figured  this  way 

10%  profit  =  90%  first  cost. 

Divide  first  cost  by  the  percentage  it  represents. 
$2000.00-7-90%  =$2222.22 

The  job  costs  him  $2640.00,  amount  received 
$2222.00,  and  his  loss  is  only  $418.00. 

The  only  way  percentage  work  at  10%  is  profit- 
able is  when  all  overhead  items,  such  as  time  of 
superintendence,  bookkeeping,  liability  insurance, 
wear  and  tear  on  tools,  etc.,  are  paid  directly  by 
the  owner.  Or,  when  the  percentage  loading  is 
allowed  as  an  item  of  charge  against  the  job  direct. 


PERCENTAGE  METHODS  59 

For  instance : 

O.  H.  X.  =20% 

Profit       =10% 

First  cost  =  70%  =  $2000.00 

$2000.00-r-70%=$2857.14  due  contractor. 

Of  course,  we  all  understand  that  it  will  be  a  hard 
matter  to  induce  the  owner  to  see  that  a  job  the 
labor  and  material  of  which  costs  $2000.00  and  on 
which  he  has  agreed  to  pay  the  plumber  10%  should 
cost  him  $2857.00.  Nevertheless  this  is  the  only 
way  by  which  the  plumber  will  net  a  10%  profit  on  the 
jobs. 

Question — In  spite  of  what  you  say  and  what 
you  figure,  there  are  men  in  this  town  who  are 
doing  work  on  a  10%  flat  basis  such  as  you  explain 
must  result  in  a  loss  and  evidently  or  apparently 
are  making  it  pay.  Can  you  explain  that? 

Answer — Not  in  any  honorable  or  honest  way. 
I  can,  however,  give  you  some  light  on  the  subject. 
We  have  some  men  in  my  home  town  who  are 
doing  this.  I  have  asked  them  how.  TWTO  re- 
fused information.  One  gave  me  this  explanation. 
"I  include  all  my  time  of  superintendence  at  twice 
the  amount  of  a  journeyman  wages.  I  charge  the 
job  with  liability  insurance  and  I  boost  the  cost  of 
material  wherever  I  can.  I  always  try  to  have 
some  of  the  preparatory  work  done  in  the  shop 
where  the  architect  or  timekeeper  cannot  control 
the  time.  Sometimes  I  have  a  squabble  when  it 
comes  to  settling  up  but  most  times  it  works.  If 
I  did  not  do  these  things  I  could  not  exist. " 


60  OVERHEAD  EXPENSE 

Now  you  have  both  ways,  the  honest  and  honor- 
able way  and  the  dishonest  and  dishonorable  way. 
Which  do  you  think  is  best  for  the  owner? 

On  Differential  O.  H.  X.  Loadings. 

Question — I  find  that  by  separating  my  jobbing 
work  from  my  contract  work  I  obtain  two  differ- 
ent overhead  percentages.  I  think  that  the  way 
to  estimate  in  contract  work  is  to  use  the  per- 
centage found  from  contract  experience.  I  can 
make  closer  estimates  this  way  as  my  overhead 
on  contract  work  is  several  points  lower  than  my 
jobbing  overhead.  Don't  you  think  that  this 
gives  one  an  advantage  over  his  competitor? 

Answer — This  method  will  perhaps  give  you  an 
advantage  over  your  competitor  but  only  so  long 
as  he  does  not  use  the  same  method.  At  the  same 
time  it  gives  your  competitor  an  advantage  over 
you  as  his  overhead  on  jobbing  work  will  be  lower 
than  yours.  It  does  seem  that  in  your  anxiety  to 
"put  one  over"  on  your  competitors  you  are  fooling 
yourself.  My  advice  would  be  to  stick  to  straight 
business  as  your  evident  desire  to  get  the  inside 
track  will  probably  lead  you  to  load  your  jobbing 
with  costs  that  rightfully  belong  to  the  contracting 
and  you  will  possibly  kill  off  your  jobbing  customers 
by  catering  to  low  price  contracting.  Such  things 
have  happened  before  now. 

Question — Some  people  advocate  estimating  the 
overhead  on  labor  cost  as  being  the  proper  method. 
Can  you  show  us  please  what  difference  it  will 
make? 


PERCENTAGE  METHODS  61 

Answer — Absolutely  no  difference  at  all,  so  far  as 
covering  your  overhead  is  concerned.  Providing 
you  use  the  proper  percentages  and  the  proper  pro- 
portions which  differ  in  each  case.  You  can  load 
your  overhead  on  the  labor,  on  the  merchandise  or 
on  the  gross  cost  just  as  correctly  as  you  can  on  the 
amount  of  business  done  or  sale  price.  It  simply 
means  a  more  involved  operation  with  no  com- 
pensating advantage  that  I  can  see. 

Let  us  take  an  example  and  see  what  we  can 
make  of  it  in  a  short  form  for  comparison.  As  a 
basis  we  will  take  the  figures  from  Case  No.  2  in 
our  experience  comparisons,  using  the  approximate 
even  percentages. 

Amount  of  business  done  was  $17,000.00. 

Percentage  labor  of  first  cost  was 36% 

Percentage  merchandise  of  first  cost  was 64% 

Percentage  O.  H.  X.  on  year's  business  was.  .  21% 

Percentage  profit  was 6% 

Percentage  O.  H.  X.  estimated  on  labor  cost 

was /.  80% 

Percentage  O.  H.  X.  estimated  on  merchandise 

cost 45% 

Percentage  O.  H.  X.  estimated  on  first  cost 

was 29% 

We  will  say  for  example  the  gross  or  first  cost  of 
a  job  was  $100.00. 

We  will  first  use  the  method  advocated  in  the 
lecture  which  gives  us: 

O.  H.  X 21% 

Profit 6% 

First  cost 73% 


100% 
$100.00-^73%= $137.00  sale  price 


62  OVEEHEAD  EXPENSE 


The  proof  is: 

O.  H.  X.  =  21%  of  $137.00=  .  $28.77 

Profit        =     6%  of  $137.00= 8.22 

First  cost=   73%  of  $137.00= 100.01 


100%=  $137.00 

This   is   the   simple   correct   method.     Although 

there  are  other  correct  methods  which  are  not  quite 

as  simple  and  other  simple  methods  not  quite  as 

correct. 

If  we  had  placed  the  O.  H.  X.  on  the  gross  cost, 

namely  labor  and  material  we  have: 

Gross  or  first  cost =   $100.00 

O.  H.  X.  29% =       29.00 

$129.00 
Profit =  8.22 

$137.22 

If  we  place  the  0.  H.  X.  on  labor  cost  we  have 
this  result: 

As  36%  of  $100.00 =     $36.00 

Productive  labor =  36.00 

O.  H.  X.  80% =  28.80 

$64.80 
Merchandise  64% =  64.00 

$128.80 
Profit =  8.22 

$137.02 

If  we  place  the  0.  H.  X.  on  merchandise  we  have: 

Merchandise =  $64  00 

O.  H.  X.  =45% =  __28._80 

$92.80 
Labor  cost =  36.00 

$128.80 
Profit = 8^22 

$137.02 


PERCENTAGE  METHODS  63 

So  you  see  there  is  absolutely  no  difference,  if  the 
proper  percentages  are  used,  so  long  as  the  same 
comparative  amounts  or  the  same  percentage  of  the 
different  component  parts  are  used  on  the  job  as  are 
contained  in  the  year's  business  upon  which  the 
working  percentages  the  standard  of  comparisons 
were  found. 

For  instance,  we  may  have  a  job  on  which  the 
labor  is  only  20%  of  the  first  cost  and  the  merchan- 
dise 80%,  thereof. 

If  in  this  case  we  were  to  place  the  burden  on 
the  labor  according  to  the  percentage  found  from 
a  36  and  64%  condition  we  would  obtain  this 
result : 

Productive  labor =     $20.00 

O.  H.  X.=80% =       16.00 

$36.00 
Merchandise =       80.00 


$116.00 
Profit =         8.22 


$124. 22  instead  of  $137.00 

If  in  this  case  we  want  to  place  the  burden  on 
merchandise  we  have : 

Merchandise =     $80.00 

O.  H.  X.=45% =       36.00 


$116.00 
Labor =       20.00 


$136.00 
Profit =         8.22 


$144.22  instead  of  $137.00 


64  OVERHEAD  EXPENSE 

These  differences  are  caused  by  the  fact  that 
the  proportions  of  labor  and  material  are  different 
from  those  on  which  the  percentages  were  found; 
causing  an  overcharge  of  0.  H.  X.  in  the  one  case 
and  an  undercharge  in  the  other.  To  charge  the 
0.  H.  X.  correctly  it  will  be  necessary  to  find  the 
proper  percentages  and  the  proper  proportions  in  each 
individual  case. 

Proponents  of  this  method  claim  that  at  the  end 
of  a  year  the  overcharges  and  undercharges  will 
balance  each  other.  That  will  be  true  only  if  the 
preponderance  of  either  labor  or  material  on  the 
year's  business  has  not  changed  from  that  on  which 
the  original  percentages  were  found.  In  the  mean- 
time you  are  over  and  undercharging  and  do  not 
know  where  you  are  at. 

The  more  I  dig  into  this  proposition  the  more  I 
am  convinced  that — for  the  plumbing  business  it  is 
misleading  in  the  extreme  to  attempt  to  place  the 
0.  H.  X.  loading  on  any  of  the  component  parts  of  a 
sale.  To  place  it  in  the  sale  price  by  the  simple 
direct  method  seems  the  wisest  and  safest  for  the 
average  master  plumber,  who  has  not  a  retinue  of 
trained  accountants  at  his  command  to  work  out 
the  proper  proportions  and  percentages  in  each 
individual  case. 

Question — Is  it  not  a  fact  that  large  manufacturing 
establishments  place  their  0.  H.  X.  on  labor  only? 

Answer — I  don't  know  much  about  any  other 
business  than  the  plumbing,  tinning  and  heating 
business.  However,  in  preparing  this  lecture  I 


PEECENTAGE  METHODS  65 

have  waded  through  a  lot  of  cost  accounting  litera- 
ture. A  good  many  people  I  fear  misunderstand 
what  is  meant  by  estimating  overhead  on  labor  in 
manufacturing.  I  believe  that  the  term  labor  hour 
is  used. 

It  costs  so  much  per  hour  to  run  a  machine  for 
power,  attendance,  wear  and  tear,  etc.  That 
constitutes  the  labor  hour  cost  for  that  operation. 
Every  operation  on  stock  goods  manufactured  for 
sale  is  measured  by  these  units  of  labor  hours. 

For  instance,  a  closet  tank  may  undergo  ten 
operations;  the  labor  hour  proportions  on  each  job 
constitutes  the  manufacturing  overhead.  Added 
to  this  is  the  expense  of  selling  and  office  overhead. 

My  advice  to  you  is  to  stick  to  the  plumber's 
problems;  never  mind  what  the  factory  does.  We 
are  not  in  their  class;  our  business  is  different. 
The  proportions  of  labor  and  material  vary  too 
much  to  make  it  a  safe  proposition. 

Profit  in  Labor. 

Another  question  that  is  frequently  asked  is  one 
concerning  earnings  on  labor  time  in  jobbing  work. 
We  will  take  one  such  question  as  asked  and  the 
answer  given  as  illustrating  the  principle  applying 
in  all  such  cases. 

Question — We  in  this  city  are  paying  our  journey- 
men $4.00  per  day  of  eight  hours  and  the  customary 
charge  is  75  cents  per  hour.  What  is  our  profit  on 
labor? 

Answer — That  depends  entirely  on  your  overhead 


66  OVEEHEAD  EXPENSE 

expense.  In  order  to  illustrate  we  will  assume 
that  you  have  the  average  overhead  of  25%. 

Gross  cost  =  .50  per  hour.     Sale  price  =  .75  per  hour. 

O.  H.  X.  25%  of  .75 =      .18% 

Net  cost =      .68% 

.75 — .68%  =  . 06%  net  profit  per  hour  or  .50  per  day. 

There  is  furthermore  another  viewpoint  to  take 
in  this  jobbing  labor  price  which  it  is  well  to  con- 
sider at  times.  There  are  any  number  of  times 
when  your  jobbing  plumber  uses  very  little  or  no 
material.  If  you  were  to  take  these  jobs  indi- 
vidually without  considering  the  rest  of  your 
business  they  are  always  done  at  a  loss.  Because 
a  different  set  of  percentages  then  applies.  For 
instance  we  will  take  case  No.  3  which  is  that  of  a 
strictly  jobbing  business  and  a  profitable  one  at 
that. 

o 

We  find  that  O.  H.  X.  is  25—%  of  total  amount  of 

business  and  that  0.  H.  X.  estimated  on  productive 
labor  is  80^%;  to.  be  conservative  we  will  place 
these  percentages  as  25  and  80%  respectively. 
We  will  further  assume  for  illustration  that  the 
rate  of  pay  is  .50  per  hour  and  the  customary 
charge  .75  per  hour. 

Now  if  we  estimate  on  the  business  as  a  whole 
we  have  the  result  as  given,  namely:  a  net  profit 
of  6J4  cents  per  hour  or  .50  per  day. 

If  on  the  other  hand  we  take  the  job  individually 
we  have  this  result: 


PERCENTAGE  METHODS  67 

Gross  cost =      .50 

O.  H.  X.  80%  of  .50 =      .45 

Net  cost =     .95 

.95 — .75  =  .20  net  loss  per  hour  or  $1.60  loss  per 
day. 

And  yet  people  will  tell  us  when  we  sell  labor  at 
.75  which  costs  us  .50  that  we  are  making  a  profit 
of  50%  or  they  think  that  they  are  absolutely  fair 
and  liberal  if  they  concede  that  we  only  make  a 
331/3%  profit.  When  as  an  actual  fact  we  make  on 

13 

this  character  of  work  a  net  loss  of  27 — %  on  the 

job.     (.20^.75  =  .2713+) 

Should  the  Good  Client  Pay  for  the  Poor  One? 

Question — It  does  not  seem  entirely  fair  to  me 
that  I  should  charge  my  business  losses  up  against 
my  overhead  expense;  in  other  words  make  the 
good  customer  pay  for  the  poor  one.  Do  you  con- 
sider that  a  just  business  policy? 

Answer — Your  conscientiousness  does  you  credit 
and  if  you  feel  that  in  taking  on  the  bad*  customer 
you  made  a  mistake  for  which  you  should  suffer, 
well  and  good  so  far  as  you  are  concerned.  It 
is,  however,  likely  to  be  bad  for  your  family 
and  for  your  business  credit.  Every  business  has 
a  certain  amount  of  bad  bills.  This  is  inherent  in 
the  business.  It  is  a  natural  business  expense  and 
should  of  right  be  charged  up  agairist  the  business 
which  in  turn  occasions  it.  That  I  believe  is  fair 
and  good  business  principle.  When  you  buy  a 


68  OVERHEAD  EXPENSE 

hat  or  a  pair  of  shoes  you  pay  your  little  part  of  the 
bill  that  the  other  fellow  did  not  pay.  When  you 
pay  your  bill  for  plumbing  supplies  you  pay  your 
little  share  of  the  other  fellow's  bill  who  forgot. 
If  you  make  too  many  bad  bills  among  your  cus- 
tomers you  go  out  of  business.  You  go  to  the  bad 
and  someone  else  must  make  it  up  for  you  either 
directly  or  indirectly.  We  all  pay  our  share  for  the 
keep  of  the  business  derelict  in  one  way  or  another. 
The  poor  rates,  the  benefit  performance  ticket  and 
the  contribution  to  the  Bureau  of  Associated 
Charities  are  cases  in  point.  The  legitimate  busi- 
ness losses  are  legitimately  chargeable  to  the  busi- 
ness, i.e.,  to  overhead  expense.  If  you  were  not  in 
business,  you  would  not  have  the  loss.  Your  over- 
head expense  should  be  charged  with  the  legitimate, 
the  customary  percentage  of  business  loss.  It  is 
self  evident  that  extraordinary  or  speculative  losses 
must  be  borne  by  yourself  personally. 

Difference  of  Conditions.     Past  and 
Present. 

• 
Question — (By  a  real  old  timer) .    How  is  it,  Mr.  B. , 

that  in  the  days  gone  by  when  we  knew  nothing 
about  overhead  expense,  we  made  more  money  in 
the  business  than  we  can  get  now  in  spite  of  all  the 
new  fangled  didoes  that  are  coming  up? 

Answer — I  know  of  no  better  way  to  explain  this 
seeming  incongruity  than  by  a  mechanical  illustra- 
tion. 

If  you  have  a  sewer  to  lay,  you  look  the  ground 
over  and  when  there  seems  to  be  plenty  of  leeway 


PEECENTAGE  METHODS  69 

you  will  say  to  the  laborer,  "Oh,  give  her  about 
two  fingers  to  the  length/7  and  you  will  generally 
come  out  about  right.  Your  general  knowledge 
and  experience  enable  you  to  do  this,  although  you 
sometimes  go  astray  and  then  when  nearing  the 
house  or  fixtures  you  run  her  absolutely  level  or 
even  with  a  little  dip  the  wrong  way.  She  works 
all  right  for  a  time  and  then  someone  gets  into 
trouble.  Usually  someone  else  has  to  bear  the 
brunt  of  making  it  all  right. 

When  a  case  comes  up  where  you  have  very  little 
leeway  it  becomes  absolutely  necessary  to  take  some 
measurements  and  run  some  levels  to  ascertain  the 
minimum  amount  of  pitch  allowable.  Your  guess 
work  experience  is  then  of  no  value  and  the  man  who 
uses  the  proper  scientific  method  has  it  all  over 
you.  He  makes  no  mistake.  He  lays  it  right! 

Just  so  it  is  with  the  question  of  scientific  business 
administration.  In  the  old  times  you  speak  of 
work  was  estimated  and  business  was  conducted 
more  on  hap-hazard  lines.  Business  conditions 
gave  you  more  leeway.  You  laid  out  your  business 
affairs  like  your  sewers  at  what  you  considered  a 
sufficient  grade,  the  leeway  of  business  conditions 
gave  you  a  wider  margin  and  when  you  made  a 
mistake  you  ran  along  on  a  level  to  make  up.  If 
you  or  some  one  of  you  old  timers  dipped  the 
wrong  way,  some  one  else  had  to  make  it  good.  It 
is  a  question  in  my  mind  if  some  of  the  ills  we  com- 
plain of  now  are  not  the  direct  result  of  the  old 
time  hit  or  miss  methods  of  doing  business. 


70  OVEEHEAD  EXPENSE 

The  conditions  of  the  present  day  are  those  of  a 
sewer  job  that  does  not  allow  us  much  leeway. 
Increased  competition,  greater  demands  on  life  and 
more  exact  requirements  of  installation  make  it 
absolutely  necessary  that  we  take  some  measure- 
ments and  run  some  levels  to  find  out  where  we 
are  at,  else  we  are  very  likely  to  make  a  botch  of  the 
job  and  find  ourselves  in  the  proverbial  hole.  We 
cannot  afford  to  make  mistakes;  we  must  use  scien- 
tific methods  to  come  out  right. 

The  next  question  was  received  by  mail  and  so 
answered. 

Correctness  of  Principles. 

Question — After  hearing  your  lecture  in  B. 

I  had  occasion  to  talk  it  over  with  a  friend  who  is  a 
school  principal  and  a  teacher  of  mathematics. 
He  claims  that  your  method  of  figuring  profit  is  all 
buncome;  that  whatever  percentage  is  added  to 
cost  of  labor  and  material  is  profit.  Of  course, 
there  must  be  enough  profit  to  cover  expenses. 
Where  do  you  get  your  authority  to  include  the 
expenses  in  the  cost? 

Answer — From  common  sense  business  experi- 
ence. I  might,  however,  quote  you  the  definition 
of  profit  as  per  the  latest  edition  of  Webster's 
New  International  Dictionary. 

" Profit:  The  excess  of  the  price  received 
over  the  cost  of  purchasing  and  handling,  or  of 
producing  and  marketing  particular  goods/7 

The  President  of  one  of  our  Massachusetts  Local 
Association  writes  me  as  follows: 


PEKCENTAGE  METHODS  71 

"I  have  talked  to  the  principal  of  the  local 
High  School  of  Commerce  and  to  the  principal  of  a 
successful  business  college,  and  both  admitted  that 
this  subject  had  never  been  treated  in  any  book  of 
arithmetic.  I  will  say  in  justice  to  the  first  men- 
tioned principal  that  he  understood  our  viewpoint 
and  stated  that  he  hoped  soon  to  have  his  ad- 
vanced classes  study  this  subject/' 

On  Business  Expansion. 

Question— If  a  man  does  $20,000.00  worth  of 
business  at  30%  added  to  gross  cost,  can  he  not  do 
the  second  $20,000.00  at  20%?  I  don't  see  why  not. 

Answer — That  depends  entirely  upon  his  0.  H.  X. 
and  on  his  equipment.  I  could  not  advise  any  man 
on  this  question  without  full  particulars  on  those 
points.  We  can,  however,  illustrate  a  hypothetical 
case  in  order  to  show  the  principles  governing  an 
answer  to  this  case. 

We  will  assume  first  a  case  where  the  amount  of 
0.  H.  X.  is  not  increased,  in  other  words  we  will 
assume  for  illustration  that  a  man  can  do  $40,000.00 
worth  of  business  for  the  same  amount  of  expense  as 
$20,000.00  worth.  And  we  will  further  assume  that 
his  0.  H.  X.  is  23%  of  $20,000.00  worth. 

His  experience  with  the  first  $20,000.00  worth  of 
business  will  look  like  this: 

First— $20,000.00  worth  of  business. 

Profit  and  expense  loading,  30%. 


72  OVERHEAD  EXPENSE 

As  $100.00+30%   =$130.00 

and  $130.00—23%  =$100.10  we  find  that 

$20,000.00—23%    =$15,400.00  gross  cost  or  1st  cost 

Gross  cost  being $15,400 . 00 

O.  H.  X.=23%  of  $20,000.00=       4,600.00 

$20,000. 00  net  cost. 

First $20,000  of  business 

Net  cost 20,000 .00 


00000  net  profit 

So  he  has  done  the  first  $20,000.00  worth  at  actual 
net  cost  without  any  profit.  The  second  $20,000.00 
worth  is  done  at  20%  added  to  first  cost.  (With- 
out any  more  money  being  paid  out  for  0.  H.  X.) 

Second  $20,000  worth  of  business. 

Profit  and  expense  loading,  20%. 

As  $100.00+20%  =$120.00 

66 

and  $120.00—16 — %=  $100.00  we  find  that 
100 
66 

$20,000.00—16 — %  =$16,668.00  gross  cost  or  1st  cost. 
100 

Gross  cost  being $16,668.00 

O.  H.  X.  being nothing 

Net  cost =  $16,668.00 

Second $20,000.00  worth  of  business 

Net  cost 16,668.00 

$  3,332.00  profit 

So  we  can  say  that  the  first  $20,000.00  worth 
taken  at  30%  added  to  gross  cost,  paid  the  year's 
overhead  and  the  second  $20,000.00  taken  at  only 
20%  added  to  gross  cost,  paid  a  net  profit  of 

33 

$3,332.00  or  .08 %  on  the  entire  $40,000.00  worth 

100 

of  business. 


PEECENTAGE  METHODS  73 

"  The  foregoing  is,  however,  not  a  true  picture  of  the 
year's  business  because  the  placing  of  the  0.  H.  X.  on  a 
part  only  of  the  year's  business  is  forced  and  untrue." 

It  is  only  given  here  as  an  example  of  how  not 
to  figure.  An  example  of  how  people  fool  themselves. 

The  amount  of  0.  H.  X.  is  here  estimated  at 
$4,600.00  which  on  the  entire  $40,000.00  worth  of 
business  would  be  11^%.  This  is  considerably 
lower  than  any  authentic  figures  that  have  been 
presented  to  us  for  any  plumbing  business  of  that 
size.  The  lowest  O.  H.  X.  percentage  I  would 
consider  safe  to  estimate  (in  absence  of  the  actual 
figures)  would  be  18%. 

Working  on  that  basis  we  have  the  following 
result : 

First  $20,000.00  worth  of  business  taken  at  30%. 

Gross  cost -  $15,400.00 

O.  H.  X.  18%  of  $20,000.00.  .  =       3,600.00 

$19,000.00 

1st $20,000.00 

Net  cost 19,000.00 

Net  profit $  1,000.00  or  5% 

Second  $20,000  worth  of  business  taken  at  20%. 

Gross  cost $16,668.00 

O.    H.    X.     =     18%    of 

$20,000.00 =       3,600.00 

Net  cost $20,268.00 

20,000  worth  of  business 
74 

Net  loss =  $     268.00  or  1 % 

100 

Profit  on  1st,     $20,000.00  worth  =  $1,000.00 
Loss  on  second,  $20,000.00  worth  =      268.00 

83 

Net  profit  on    $40,000.00  worth  =  $    732.00  or  1 —  % 

100 


74  OVEEHEAD  EXPENSE 

So  according  to  these  figures  you  could  not  afford 
to  take  the  second  $20,000  worth  at  20%  as  you 
make  a  loss  on  that  transaction. 

The  mistake  you  make  in  your  proposition  is  in 
assuming  that  the  second  $20,000.00  worth  of  work 
will  not  raise  your  overhead  expense.  It  is  true 
that  it  will  not  double  the  overhead  but  it  will  raise 
it  sufficiently  to  make  it  unprofitable  to  lower  the 
loading  on  gross  cost  from  30%  to  20%. 

There  is  another  viewpoint  to  this  question  which 
must  be  considered.  That  is  your  equipment. 
If  you  are  equipped  to  do  a  $40,000  business  in 
tools,  vehicles,  office  help,  shop,  etc.,  economically, 
it  will  raise  your  O.  H.  X.  percentage  considerably 
should  you  only  get  $20,000.00  worth  of  work  one 
year;  consequently  it  might  prove  profitable  in  that 
event  to  take  the  additional  work  in  order  to  cover 
your  overhead.  Great  care,  however,  must  be 
exercised  so  as  not  to  take  it  so  low  as  to  fall  short 
of  covering,  which  was  what  did  occur  in  the  case 
illustrated. 

If  on  the  other  hand  your  equipment  is  fitted  for 
a  $20,000.00  annual  business,  the  additional  ex- 
pense and  equipment  necessary  to  handle  an  added 
$20,000.00  worth  of  business,  may  possibly  amount 
to  more  than  the  lowered  percentage  of  loading  will 
provide  for. 

The  lesson  we  learn  from  this  question  and  answer 
is  the  same  that  evolves  from  all  studies  of  business 
processes,  namely:  That  we  must  know  our  over- 
head percentage  exactly  in  all  its  phases  to  be  able 


PERCENTAGE  METHODS  75 

to  do  business  intelligently  and  profitably.  Other- 
wise, "Take  a  chance,"  with  all  that  that  phrase 
implies. 

Finding  Percentages. 

Question — You  say  that  it  is  easier  to  find  the 
percentage  by  putting  it  in  the  form  of  a  fraction. 
I  don't  quite  understand  that,  or  why  you  do  it. 

Answer — Percentage  is  fundamentally  nothing 
else  but  decimal  fractions.  You  say  that  50  is 
one  half  of  100.  That  means  that  50  is  .50  or 
.5  of  100.  Expressed  in  percentage  it  means  that 
50  is  50%  of  100. 

Or,  20  is  1/5  of  100.  Likewise  20  is  .20  or  20  one 
hundredths  or  20%  of  100.  The  principle  is  that 
governing  changing  common  fractions  into  decimals, 
which  is: 

"Divide  the  numerator  by  the  denominator,"  or, 
"divide  the  upper  figure  of  a  fraction  by  the  lower!" 

So  if  you  want  to  find  what  percentage  5  is  of 
400  you  put  it  into  the  form  of  a  common  fraction 
and  proceed  according  to  the  rule  for  changing 
common  fractions  into  decimals. 

5 

25 

400)5. 0000(. 0125  or  1 — %  or  1J£% 
400xx  100 

1000 
800 

2000 
2000 

The  proof  is  400 X. 0125  =  5.0000. 

If  you  want  to  find  what  percentage  400  is  of  5. 


76  OVEBHEAD  EXPENSE 

400 

5  )400(80.  or  8000% 
40x 

0 

The  proof  is  5X80  =  400. 
Or,  5X80.00  =  400. 

A  business  man  spends  $642.00  for  rent.  He 
does  $7682.00  worth  of  business  and  he  wants  to 
find  out  what  percentage,  what  proportion  his  rent 
bears  to  the  amount  of  business  done.  He  puts  the 
proposition  into  the  form  of  a  fraction  and  proceeds. 
$642.00 


$7682 . 00)$642 . 0000( .  0835  + 
61456xx 


27440 
23046 

43940 
38410 


5530 

35 
This  reads  8 — •%   or   eight   and   thirty-five    one 

hundredths  per  cent. 

In  business  life  equations  are  not  usually  carried 
to  their  ultimate  conclusions  as  hundredths  of  one 
per  cent  is  considered  sufficiently  definite  for  business 
purposes. 


CHAPTER  IV. 
PROPORTIONING  OVERHEAD  EXPENSE. 

Those  who  have  studied  and  talked  upon  this 
matter  of  overhead  expense  among  the  crafts  meet 
many  and  diversified  opinions  as  to  the  proper 
proportioning,  both  in  the  methods  of  arriving  at  the 
proportions  of  overhead  expense  and  in  placing  the 
burden. 

Proportioning  the  Burden. 

The  proposition  of  placing  the  burden  according 
to  the  amount  of  service  rendered  by  the  proprietor 
has  many  adherents.  Some  men  believe  that  the 
burden  should  be  placed  entirely  on  the  labor 
charges.  Others  again  favor  placing  the  loading 
on  merchandise  handled.  While  some  believe  that 
the  delivered  cost,  the  first  or  gross  cost  namely, 
labor  plus  merchandise,  should  bear  the  burden. 

By  using  either  or  any  of  the  methods  or  a  com- 
bination of  any  number  of  them,  the  overhead  ex- 
pense can  be  just  as  correctly  placed  as  by  the 
method  advocated  in  the  lecture,  which  places  the 
burden  in  the  sale  price,  providing  always  that 
the  proper  proportions  and  the  proper  percentages 
or  amounts  are  used. 

Advantage  over  Competitors. 

The  adherents  of  all  of  these  methods  claim  an 
advantage  over  their  competitors  from  their  par- 

77 


78  OVERHEAD  EXPENSE 

ticular  method.  The  fact  is  that  by  placing  the 
expense  loading  on  any  one  of  the  component 
parts  of  a  sale  he  will  have  the  advantage  over  his 
competitor  (who  uses  a  different  method)  on  some 
jobs.  For  the  same  reason  he  will  be  at  a  dis- 
advantage on  other  jobs,  accordingly  as  the  factors  of 
labor,  material  or  superintendence  preponderate  in 
the  different  jobs.  That  these  factors  vary  very 
considerably  in  different  jobs  is  a  fact  so  well  known 
as  to  need  no  elucidation  at  this  time. 

We  must  always  remember  that,  "The  more  we 
split  up  and  complicate  the  finding  and  placing  of 
the  overhead  expense  burden,  just  to  that  extent 
do  we  invite  errors  and  consequent  losses!" 

Question  of  Correct  Principle. 

The  question  that  here  presents  itself  is  simply 
this:  Which  is  the  correct  principle?  And  this 
again  brings  up  the  question:  What  is  it  that 
occasions  overhead  expense?  Is  it  the  proprietor's 
activity?  No.  For  he  may  be  sick  and  absolutely 
unable  to  attend  to  the  business.  Or  he  may  own 
the  business,  but  not  be  active  in  it,  hiring  some 
one  else  to  run  it.  In  either  case  the  overhead 
expense  goes  merrily  on.  Clearly  the  proprietor 
does  not  occasion  the  overhead  expense. 

Is  it  the  labor  employed  that  occasions  this 
expense  or  the  fact  that  labor  is  employed? 

The  boss  may  work  along  without  any  help  or  he 
may  have  very  much  help.  He  will  find  that  the 
percentage  of  overhead  expense  has  not  varied  very 
materially  due  to  either  of  these  circumstances. 


PEECENTAGE  METHODS  79 

There  are  certain  lines  of  mercantile  businesses 
that  employ  very  little  or  no  productive  labor. 
Still  they  all  have  overhead  expense.  Clearly  it  is 
not  the  labor  that  creates  overhead  expense. 

Is  it  merchandise  that  occasions  the  overhead 
expense?  A  great  many  of  our  people  stock  very 
little  material,  the  supply  houses  stock  it  for  them. 
Very  few  stock  any  fixtures.  While  there  would 
seem  to  be  more  moral  justice  in  blaming  the  mer- 
chandise than  any  of  the  other  factors,  still  the  fact 
is  apparent  that  the  merchandise  or  the  fact  that 
merchandise  is  handled  does  not  in  itself  occasion 
the  overhead  expense. 

Why  then  should  the  customer  whose  particular 
job  carries  a  preponderance  of  supervision  called 
proprietor's  service,  or  whose  particular  job  may 
carry  a  preponderance  of  either  labor  or  mer- 
chandise bear  the  entire  or  even  the  greater  share  of 
the  overhead  expense  burden. 

Overhead  expense  is  occasioned  by  the  simple  fact 
that  you  are  in  business. 

Every  part  and  element  going  to  make  up  your 
business  in  its  entirety  helps  to  make  overhead  ex- 
pense. And  the  business  in  its  entirety  should 
rightly  bear  this  expense  or  burden. 

Of  course,  it  is  possible  to  figure  out  with  approxi- 
mate mathematical  exactness  how  much  each 
separate  element  contributes  to  the  burden;  how 
much  each  particular  job  and  its  component  parts 
ought  to  bear — but,  to  do  this  presupposes  an 
accounting  department  many  times  more  extensive 


80  OVEEHEAD  EXPENSE 

and  expensive  than  any  plumbing  business  of  the 
present  day  can  afford.  It  would  run  up  the  over- 
head expense  to  a  prohibitive  amount  in  any 
competitive  contracting  business. 

It  may  be  applicable  in  large  manufacture  where 
practically  the  same  operations  (with  the  same  ma- 
terial and  with  standardized  methods)  are  carried 
on  day  after  day. 

It  has  academic  value  to  the  student  of  accounting 
mathematics  and  has  undoubted  value  to  the  large 
manufacturer,  but  for  the  average  business  man  it 
is  impractical. 

Conditions  as  They  Are. 

Several  years  ago  a  census  was  taken  by  interested 
officers  of  an  association  with  98  members  in  one  of 
our  medium-sized  eastern  cities.  This  showed 
8  firms  employing  an  office  staff,  that  is  one  or  more 
regular  bookkeepers;  14  employed  a  young  person 
to  help  with  the  bookkeeping  and  attend  to  the 
store;  10  had  their  wives  or  other  members  of  the 
family  to  attend  to  their  books.  Of  the  remaining 
members  10  did  not  give  any  information  and  56 
pleaded  guilty  to  taking  care  of  that  work  themselves. 

Of  the  56  (so  far  as  the  officers  were  able  to  ascer- 
tain) 6  had  graduated  from  grammar  school  and 
spent  some  time  in  a  high  school;  4  had  taken  a 
course  in  business  college  while  learning  their  trade; 
12  had  never  learned  the  mechanical  trade  but  had 
drifted  into  the  business  after  other  mercantile 
experiences.  The  remainder  had  left  school  early 
to  go  to  work  and  had  had  no  mercantile  or  office 


PEBCENTAGE  METHODS  81 

experience  whatever  prior  to  engaging  in  business 
for  themselves.  This  condition  we  believe  to  be 
about  the  average  condition  throughout  the  country, 
in  the  plumbing  and  allied  building  trades. 

Under  these  conditions  it  were  manifestly  absurd 
to  consider  any  but  the  most  simple  direct  method 
as  being  of  practical  value  to  the  average  business 
man. 

Fair  Way  of  Placing  Overhead. 

In  the  face  of  the  foregoing  it  is  self-evident  that 
the  fair,  just  and  practical  way  is  to  find  what 
proportion  your  overhead  expense  bears  to  the 
total  amount  of  business  done,  and  then  to  let  each 
job  in  its  entirety  bear  its  proportion  of  the  burden. 
Your  shop  or  business  is  there  for  the  accommoda- 
tion of  the  public.  The  public  who  make  use  or 
have  need  of  this  accommodation  should  and  must 
in  justice  pay  for  its  maintenance. 

If  the  public  does  not  need  this  accommodation  it 
will  not  patronize  it  and  the  proprietor  had  better 
go  out  of  business  rather  than  maintain  it  (as  is 
too  often  the  case)  at  the  expense  of  his  wife  and 
children  and  at  the  expense  of  his  creditors,  simply 
because  he  does  not  know  what  it  costs  him  to  main- 
tain this  public  accommodation. 


CHAPTER  V. 

COMPARATIVE  OVERHEAD  EXPENSE 
STATEMENTS. 

Two  facts  must  ever  be  kept  in  mind  in  esti- 
mating the  cost  of  doing  business.  One  is  that  there 
is  no  universal  percentage  applicable  to  every  case. 
Each  man  must  find  his  own  costs  and  govern 
himself  accordingly.  At  the  same  time  it  is  well 
to  adopt  an  average  compiled  from  the  experience 
of  others  until  the  beginner  gets  definite  data  from 
his  own  experience. 

The  second  fact  is  that  a  percentage  that  would 
seem  extravagant  in  one  business  would  really  be 
very  economical  as  applied  to  another  business. 
Overhead  expense  percentage  is  not  an  arbitrary 
matter;  it  is  a  result.  It  is  influenced  by  other 
factors  in  the  total  amount  of  business  done.  The 
other  factors  are  cost  of  material,  cost  of  productive 
labor  and  profit.  The  last  item  of  these  is  more  or 
less  arbitrary  and  is  the  one  factor  that  has  much 
influence  on  the  relative  percentage  of  overhead 
expense.  It  is  my  intention  to  try  to  show  this 
clearly.  I  shall  try  to  do  this  by  actual  figures 
secured  from  various  business  men,  comparing 
one  statement  with  another. 

Case  No.  1. 

For  the  first  illustration  I  propose  to  take  the 
case  of  a  business  run  under  a  practical  minimum  of 

82 


PEECENTAGE  METHODS  83 

actual  overhead  expense.  Somewhat  of  the  history 
of  the  case  is  given,  so  that  the  reader  may  under- 
stand the  circumstances  surrounding  it. 

In  1911  I  attended  an  open  meeting  of  a  Master 
Plumbers7  Association  at  which  some  non-members 
were  present.  While  there  I  was  asked  to  give  a 
chalk  talk  on  "  Overhead  Expense."  In  this 
blackboard  demonstration  I  used  the  itemized  list 
of  expenses,  as  per  the  card  published  by  the  New 
Jersey  Master  Plumbers'  Association.  A  few  days 
later  I  received  a  letter  from  one  of  the  non-members 
who  was  present,  from  which  the  following  is 
extracted: 

"It  may  be  that  you  and  some  of  the  big  bugs  have  25  per 
cent,  expenses,  but  that  is  too  much.  The  other  little  fellows 
and  mysel  can  beat  that  all  hollow.  I  have  got  about  all 
the  work  I  can  do  and  employ  a  plumber  in  busy  seasons, 
and  sometimes  a  tinner  and  can  beat  you  out  on  any  job  if 
you  figure  25  per  cent,  for  expenses,  as  my  expenses  are  much 
less.  Half  the  items  you  put  on  the  blackboard  cost  me 
nothing.  I  own  my  place,  get  along  without  a  horse  and 
wagon,  do  my  own  bookkeeping  and  make  money.  You 
ought  to  be  able  to  get  along  with  about  10  to  15  per  cent, 
expense.  Get  next  and  learn  the  game/' 

Recognizing  the  name  as  that  of  a  former  fellow 
journeyman  worker,  I  took  the  matter  up  with  him 
by  letter  and  later  personally,  as  I  also  wanted  to 
learn.  To  my  surprise  I  found  that  an  intelligent 
set  of  accounts  were  kept,  simple  but  understand- 
able, so  we  could  trace  all  that  came  in  and  all  that 
went  out.  We  took  one  year  from  January  1  to 
December  31.  The  first  item  was  salary.  The 
proprietor  in  this  case  did  not  pay  himself  a  salary, 
but  took  amounts  for  private  use  as  he  needed 


84  OVEKHEAD  EXPENSE 

them.  These  amounts  in  the  year  totaled  $1050  in 
round  numbers,  or  about  $20  per  week.  Journey- 
men's wages  in  that  town  were  $4  per  day,  or  $24  per 
week  of  44  hours. 

Owner's  Salary  Less  than  Journeymen's. 

This  man  gets  to  the  shop  at  7  o'clock  a.m.  and 
usually  leaves  for  home  at  6  or  6:30  p.m.,  averaging 
a  66-hour  week,  and  this  does  not  include  time  on 
Sunday  mornings  usually  given  to  book  work.  He 
was  entitled  at  journeymen's  wages  to  $1650.00  for 
his  salary.  Nevertheless  he  drew  only  $1050.00. 
The  time  he  actually  spent  with  the  tools  on  jobs 
during  the  year  as  charged  on  his  books  was  $546.00, 
and  he  estimated  that  he  spent  another  $100.00 
worth  of  time  on  contracts  working  with  his  man. 
So,  we  subtracted  $646.00  from  the  pittance  of 
$1050.00,  which  left  $404.00  actually  charged  to 
overhead  expense. 

The  next  item  was  rent.  He  could  rent  his  place 
easily  for  from  $15.00  to  $18.00  per  month,  there- 
fore I  claimed  that  $16.00  per  month  were  chargeable 
to  that  item,  which  was  finally  allowed.  Gas  bills 
were  next  to  nothing  in  summer  and  about  $1.50 
to  $2.00  in  winter,  so  that  went  down  at  $1.00  per 
month.  Heat,  which  was  furnished  by  a  gasoline 
furnace  in  the  office  portion  when  wanted  and  a 
pot  stove  in  the  shop,  was  charged  accordingly. 

How  the  Overhead  Expense  is  Kept  Down. 

He  does  not  have  a  telephone.  The  butcher  next 
door  takes  and  sends  all  messages  at  a  rate  agreed 


PEECENTAGE  METHODS  85 

between  them.  He  paid  the  butcher  that  year 
$3.80.  No  horse  and  wagon  is  kept,  nor  does  he 
employ  a  bookkeeper.  His  fire  and  accident  in- 
surance cost  $48.00  per  year.  His  taxes  are  per- 
sonal only.  He  has  an  arrangement  with  a  local 
cartman  by  which  he  secures  at  a  minimum  rate  the 
absolutely  necessary  carting  service.  All  cartage 
possible  is  thrown  on  the  supply  dealer  or  house 
owner.  He  paid  the  cartman  $18.20  during  the 
year  in  question. 

No  account  was  kept  of  carfares,  but  by  checking 
up  the  various  jobs  as  charged  we  came  to  the 
conclusion  that  $26.00  was  conservative,  in  view 
of  the  fact  that  no  horse  is  kept.  Tools  were 
bought  during  the  year  to  replace  those  worn  out 
and  lost.  No  allowance  was  made  for  collection. 
He  collected  what  he  could  and  let  the  rest  stand 
and  for  bad  accounts,  "he  guessed  they  were  all 
good  if  he  had  time  to  go  after  them."  However, 
after  a  bit  he  admitted  that  perhaps  $20.00  would 
cover  all  the  bad  jobs  he  had  done  that  year.. 
Waste  materials  he  had  none;  everything  was  used 
up  somewhere  or  sold  to  the  junk  dealer  twice  a 
year.  I  found,  however,  in  a  back  yard  quite  a  lot 
of  split  wrought  pipe,  some  broken  tile  pipe  and 
other  things  we  all  know  of,  and  finally  he  agreed 
that  he  had  some  waste  probably  worth  about  $5.00. 
When  I  mentioned  replacing  defective  goods  this 
made  him  sore.  He  was  having  trouble  right  then 
with  one  source  of  supply  over  some  iron  enameled 
ware  and  some  closet  tank  linings,  so  when  he  said 
$50.00  I  cut  it  down  to  a  conservative  $40.00.  He 


86  OVERHEAD  EXPENSE 

did  not  lose  much  on  account  of  lost  labor,  as  he 
generally  charged  it  up  some  way.  This  item  might 
possibly  be  worth  $10.00  a  year.  Next  week  he 
wrote  me:  "Have  looked  into  the  lost  labor  ques- 
tion more  closely;  better  make  it  $25.00. "  So  I 
made  it  $20.00. 

Items  that  Were  Not  Considered. 

The  matter  of  allowances  on  bills  at  settlement 
was  another  item  he  refused  to  consider  at  first,  but 
finally  came  to  the  conclusion  that  he  did  make 
some  allowances  that  year,  perhaps  $5.00.  Re- 
garding interest  on  capital,  he  estimated  the  value 
of  tools  and  merchandise  at  $475.00.  Outstanding 
.accounts  $416.13.  Work  done  or  contracts  under 
way,  estimated,  $500.00.  Unsettled  bills  from 
former  years  in  process  of  settlement,  $375.16; 
total,  $1766.29.  Deducting  $243.16  for  current 
supply  house  bills  leaves  $1523.13.  Add  to  this  a 
business  bank  balance  of  $486.75,  makes  an  in- 
vestment of  $2009.88,  or  $2000  in  round  numbers, 
representing  the  savings  of  many  years  of  journey- 
man's work  and  some  10  years  in  business.  Surely 
he  was  entitled  to  savings  bank  interest  on  this. 

However,  he  takes  the  stand  that,  when  he  was 
•obliged  to  borrow  some  money  he  had  to  pay  6% 
interest,  therefore  charges  interest  on  capital  in- 
vested at  the  higher  rate. 

Postage  and  stationery  were  easily  found  on  his 
books.  Association  dues  he  did  not  have,  as  he 
had  never  felt  that  he  could  afford  the  cost  of  mem- 


PERCENTAGE  METHODS  87 

bership.  Advertising  in  programs,  ball  tickets, 
etc.,  cost  him  as  scheduled.  Then  he  has  a  helper. 
Allowing  that  he  must  have  a  competent  helper, 
he  pays  him  $10.00  a  week.  He  claims  that  fully 
one-half  this  helper's  time  is  charged  to  customers, 
so  we  charged  half  of  his  salary  to  overhead  expense. 
This  made  a  total  overhead  cost  of  $1265.17, 
divided  as  follows: 

Salary $404.00 

Rent 192.00 

Light 12.00 

Heat 14.00 

Telephone 3 .80 

Horse  and  wagon .... 

Bookkeeper .... 

Insurance 48 . 00 

Taxes 5.10 

Cartage 18.20 

Carfares 26 .00 

Tools 38.75 

Collections .... 

Back  Accounts 20 . 00 

Driver .... 

Waste  materials .  5 . 00 

Replacing  defective  goods 40 . 00 

Labor  lost 20.00 

Allowances 5 . 00 

Interest  on  capital  at  6  per  cent 120 . 00 

Postage 10.50 

Stationery  and  printing 7 . 42 

Association  dues .... 

Advertising 15 . 40 

Boy's  time 260.00 

Total $1265.17 

The  total  amount  of  business  done  that  year  was 
$4983.63,  which  makes  an  overhead  expense  of 
25.4%  on  the  amount  of  business  done. 


88  OVEEHEAD  EXPENSE 

Proprietor's  time  in  productive  labor  was .  $646 . 00 
Hired  journeymen  and  helpers7  productive 

labor  was 285 .00 

Proprietor's  helper's  productive  labor  was .  260 . 00 

Total  productive  labor $1191 .00 

which  makes  an  overhead  expense  of   106.22   per 
cent,  on  productive  labor. 

Productive  labor  cost $1191 .00 

Year's  supply  bills 2324.11 

Total  first  cost $3515.11 

The  overhead  expense  was  thus  35.38  per  cent,  of 
the  first  cost. 

First  cost $3515 . 11 

Overhead  expense 1265 . 17 

Net  cost $4780.28 

Amount  of  business  done 4983 . 63 

Net  cost..  4780.28 


Net  profit $203 .35 

Showing  a  net  profit  of  4.08  per  cent,  on  business 
done. 

Had  the  proprietor  in  this  case,  No.  1,  drawn 
journeyman's  wages  for  the  number  of  hours  he 
actually  put  in  at  his  business  it  would  have  added 
$600.00  to  his  costs,  and  he  would  have  been  about 
$400.00  shy  of  meeting  his  overhead  expenses. 
Only  by  working  overtime  and  at  less  than  standard 
wages  was  it  made  possible  to  show  a  net  profit  of  a 
trifle  over  4%.  Had  he,  on  the  other  hand,  known 
what  he  now  knows,  he  would  have  charged,  as  he 
now  charges,  an  added  percentage  of  profit,  thus 
lowering  his  costs  and  thereby  still  more  increasing 
his  earnings. 


PEECENTAGE  METHODS  89 

Case  No.  2  shows  a  very  low  percentage  of  over- 
head expense.  It  also  shows  plainly  the  fact  that  a 
low  overhead  percentage  does  not  necessarily  mean 
a  successful  or  a  profitable  business. 

Details  of  the  Business  Costs. 

The  rent  charge  on  the  business  is  small.  In- 
cluding the  rent  for  a  stable  and  lot,  the  shop  being 
over  the  stable,  the  owner  pays  $18.00  per  month. 
The  amount  charged  for  salary  is  definite,  as  the 
owner  withdraws  $35.00  per  week  for  himself,  win 
or  lose. 

Light  and  heat  he  has  none.  For  telephone  he 
pays  $52.00  per  year.  The  work,  being  mostly 
all  new  work,  materials  are  carted  by  the  supply 
houses.  He  runs,  however,  a  converted  touring 
car  auto-wagon,  with  which  he  gets  around  to  the 
various  jobs  and  carts  away  the  left-overs.  This 
car  costs  for  up-keep  $300.00  per  year,  as  he  attends 
to  most  of  his  repairs  himself.  No  bookkeeper  is 
kept.  His  wife  (who  was  a  stenographer  and  office 
assistant  before  marriage)  attends  to  his  book  work,, 
for  which  he  allows  her  $5.00  per  week  pin  money. 
Insurance,  auto  insurance,  liability  insurance  on 
several  jobs  when  the  contract  called  for  it,  also 
personal  accident  insurance,  cost  him  for  one  year 
$280.00.  Taxes — personal  and  licenses  in  four 
municipalities,  as  well  as  surety  bonds — cost  for 
the  same  year  $51.00.  Freight,  cartage,  etc., 
$35.00.  Carfares  were  estimated  at  $10.00.  Tools: 
He  figures  that  his  tools  at  the  end  of  the  year  were 
worth  $200.00  more  than  at  the  beginning,  although 


90  OVEEHEAD  EXPENSE 

his  bills  for  tools  ran  to  nearly  $300.00,  deprecia- 
tion being  considered  against  first  cost.  Collections 
last  year  cost  him  $10.00.  He  estimates  losses 
through  bad  debts  to  have  been  $300.00.  Waste 
material  he  estimates  at  $100.00.  Men  are  paid  by 
the  hour  when  at  work  on  the  job,  so  there  is  no 
lost  labor.  All  the  proprietor's  time  is  employed  in 
seeing  that  men  are  on  the  job  and  only  when  work 
is  to  be  done.  Allowances  for  goods  claimed  not 
up  to  the  mark  are  estimated  at  $100.00.  Interest 
on  capital:  Auto  is  valued  at  $800.00,  stock  and  tools 
at  $1200.00,  bank  balance,  $400.00;  total  $2000.00. 
As  he  owes  the  supply  houses  as  much  as  is 
owing  him  on  contracts,  there  is  no  cash  invest- 
ment, according  to  his  accounting.  Nevertheless, 
the  interest  on  $2000.00  at  3%  added  to  interest 
paid  on  notes  and  cash  loans  footed  up  for  one  year 
to  $380.00.  Postage  is  estimated  at  about  $25.00. 
Stationery  and  printing  bills  were  $34.60.  Associa- 
tion dues:  Master  Plumbers'  and  Board  of  Trade, 
$24.00.  Incidentals  he  estimates  at  $25.00. 

Itemized  Overhead  Expense  Account. 

Salary $1820.00 

Rent 216.00 

Light 

Heat 

Telephone 52.00 

Automobile  truck 300.00 

Bookkeeper 260.00 

Insurance 280.00 

Taxes,  licenses,  bonds 51 .00 

Cartage,  freight 35.00 

Carfares 10.00 

Tools • 200.00 

Carry  forward $3224.00 


PEECENTAGE  METHODS  91 


Brought  forward $3224.00 

Collections 10.00 

Bad  accounts 300.00 

Driver .... 

Waste  material.  . 100.00 

Replacing  defective  goods .... 

Labor  lost .... 

Allowances 100.00 

Interest 380.00 

Postage 25 .00 

Stationery  and  printing 34 . 60 

Association  dues 24 .00 

Incidentals..  25.00 


$4222.60 

Total  amount  of  business  done  for  term  covered 
by  this  statement,  $24,480.00. 

Percentage  of  overhead  expense  on  business 
done,  17.25.  Paid  out  in  wages  other  than  enum- 
erated in  expense,  $7240.00.  Percentage  of  over- 
head expenses  on  productive  labor,  58.32.  Mer- 
chandise purchased,  $13,597.80.  First  cost,  $20,- 
837.00.  Percentage  of  overhead  expense  on  first 
cost,  20.36. 

First  cost ' $20,837.80 

Overhead  expense 4,322.60 

Total  cost $25,160.40 

Amount  business 24,480.00 

Net  loss $680.40 

When  asked  what  percentage  of  profit  he  had 
figured  to  make  the  proprietor  answered:  "All  I 
could  get."  When  questioned  closer  it  developed 
that  he  usually  figured  from  15  to  20%  added  to 
first  cost.  Some  jobs  where  he  stood  in  right  had 
been  obtained  at  25%  added  to  first  cost,  while 
some,  where  competition  was  keen,  had  been  taken 
at  12%  added  to  first  cost.  He  had  never  before 


92  OVERHEAD  EXPENSE 

this  time  had  a  detailed  statement  of  his  business*, 
affairs  nor  figured  out  what  his  overhead  expenses- 
were.  He,  like  so  many  of  us,  had  gone  along 
month  after  month  taking  work  at  low  prices  be- 
cause he  thought  his  overhead  expenses  were 
practically  nothing  and  because  other  people  were 
doing  that  class  of  work  at  these  low  prices;  on  the 
theory  that  to  keep  moving  meant  doing  business 
as  long  as  he  could  cut  his  expenses. 

"When  you  add  15%  to  the  cost  of  labor  and 
material  you  are  losing  money." 

A  Business  of  Another  Type. 

Case  No.  3  fits  in  here  very  nicely.  Like  cases 
Nos.  1  and  2,  it  is  essentially  a  one-man  business. 
However,  in  the  method  of  doing  business  the 
proprietor  in  this  case  certainly  works  on  different 
lines  than  the  men  in  the  former  cases.  He  does 
not  attempt  to  do  any  productive  work.  While 
circumstances  occasionally  demand  some  small 
jobs  from  him  personally,  they  are  so  few  that  he 
does  not  think  it  worth  while  eliminating  them  from 
his  overhead  expenses.  He  attends  to  the  bookkeep- 
ing and  buying  and  to  his  horse.  This  keeps  him 
busy  from  about  7  o'clock  a.m.  to  5  or  6  o'clock  p.m. 
Of  course,  he  looks  after  the  men  and  after  his  jobs, 
but  always  in  business  hours  only. 

This  work  he  figures  is  worth  $100.00  per  month. 
On  the  first  of  every  month  when  he  pays  his  rent 
he  draws  a  personal  check  for  $100.00.  In  addition 
to  this  he  drew  various  sums  at  different  times  as 
he  felt  that  he  needed  them.  The  entire  with- 


PEECENTAGE  METHODS  93 

•drawals  amounted  in  the  year,  under  scrutiny,  to 
$1340.00.  He  pays  $22.00  a  month  for  a  store  and 
:small  stable  and  shop  in  the  rear.  He  had  elec- 
tricity and  gas  in  the  shop  and  stable,  a  gas  soldering 
pot  and  small  electric  welding  fixtures.  All  this 
cost  him  $13.60  per  annum  (the  amount  looks  very 
ismall,  but  we  must  take  the  figures  as  given). 
Heat:  He  has  a  small  steam  plant,  which  last  year 
burned  four  tons  of  pea  coal  at  $4.80  per  ton.  His 
telephone  cost  $42.00.  For  the  year  his  vehicle 
upkeep,  without  renewal  provisions,  cost  $336.00. 
Insurance,  $8.40  for  fire  and  vehicle  (very  low). 
Taxes,  personal,  $4.20.  Freight,  $6.40.  Carfares 
are  estimated  at  $15.00  and  tools  are  estimated  at 
$15.00.  Bad  accounts,  $45.00.  Driver,  nothing. 
Waste  material  estimated  at  $25.00.  Replacing 
defective  goods  given  at  $18.60,  labor  lost  at  $15.00, 
and  allowances  at  $20.00. 

Interest  on  capital  invested  is  given  at  $57.00. 
This  figures  out  an  investment  of  $1900.00,  which 
looks  conservative.  Stationery  and  printing,  $6.00, 
and  association  dues  at  $18.00. 

This  man  certainly  is  not  afraid  of  a  high  over- 
head, as  he  is  well  above  the  average.  The  peculiar 
part  of  this  case  is  that  he  shows  a  higher  net  earning 
than  either  of  the  other  cases  (one  of  which  shows  a 
net  loss),  which  have  a  lower  overhead. 

A  comparison  with  case  No.  1  shows  a  material 
account  of  only  about  $200.00  more.  The  dif- 
ference evidently  lies  in  the  fact  that  this  man  is  not 
afraid  of  charging  a  decent  price  for  his  work.  The 
schedule  works  out  like  this: 


94  OVEEHEAD  EXPENSE 

Salary $1340.00 

Rent 264 .00 

Light 13.60 

Heat 19,20 

Telephone 42.00 

Horse  and  wagon 336 . 00 

Bookkeeper .... 

Insurance 8 .40 

Taxes 4.20 

Cartage 6 .40 

Carfares 15.00 

Tools 15.00 

Collections .... 

Bad  accounts 45 . 00 

Driver .... 

Waste  material 25 .00 

Replacing  defective  goods 18.60 

Labor  lost 15 .00 

Allowances 20.00 

Interest 57 .00 

Postage 10.00 

Association  dues 18 . 00 

Stationery  and  printing 6.00 

Total $2278.40 

Amount  of  business  done $6965 . 02 

Percentage  of  overhead  expense  on  busi- 
ness done 32 . 71 

Productive  labor 1859.40 

Percentage  of  overhead  expense  on  pro- 
ductive labor 122.88 

Productive  labor 1859.40 

Merchandise 2416 .72 

First  cost 4276.12 

Percentage  of  overhead  expense  on  first 

cost 53.31 

First  cost 4276 . 12 

Overhead 2278.40 

Total  cost $6554.52 

Amount  of  business  done 6965 . 02 

Total  cost 6554.52 

Net  profit $410.50 

which  is  a  net  profit  of  5.89%  on  business  done. 

This  parcy  when  questioned  writes  as  follows: 


PEECENTAGE  METHODS  95 

"My  business  is  altogether  jobbing.  Straight 
day  work  and  contract  jobbing,  overhauling,  etc. 
I  aim  to  get  an  advance  of  50%  over  cost  of  labor 
and  material  on  small  work  up  to  $200.00,  and  an 
advance  of  from  25  to  50%  on  larger  work,  as  the 
size  of  the  job  runs.  I  cannot,  and  no  one  else  can, 
do  a  profitable  business  on  a  smaller  advance  than 
this.  I  have  tried  a  lower  percentage,  and  when  I 
did  so  I  obtained  more  business,  but  found  no 
greater  amount  of  profit  at  the  end  of  the  year. 
I  aim  to  make  6%  of  net  profit  over  a  modest  wage 
for  my  services,  and  I  find  I  cannot  make  it  unless 
1  get  my  price. " 

This  needs  no  further  comment. 

The  three  cases  taken  up  in  this  article  are  il- 
lustrative of  the  majority  of  plumbing  businesses. 
In  1912  the  New  Jersey  State  Association  of  Master 
Plumbers  conducted  an  inquiry  on  liability  insurance 
responsibility.  According  to  its  report,  out  of 
122  returns  received,  60  reported  an  annual  business 
amounting  to  between  $9000.00  and  $21,000.00 
So  it  may  be  said,  with  a  fair  assurance  of  being 
correct,  that  from  $10,000.00  to  $20,000.00  is  about 
the  amount  of  business  done  annually  in  the  average 
plumbing  shop. 

In  the  first  three  businesses  analyzed  the  pro- 
prietor took  upon  himself  the  bookkeeping  and  ac- 
counting end  as  well  as  the  supervision,  and  in 
case  No.  1  the  major  portion  of  the  mechanical  end 
also.  In  the  three  cases  now  to  be  considered  the 
proprietors  have  their  bookkeeping  done,  give  some 
little  time  to  working  with  the  tools  and  the  re- 


96  OVEEHEAD  EXPENSE 

mainder  to  general  supervision  and  estimating. 
These  conditions  are  such  as  prevail  usually  in  shops 
coming  under  the  category  of  medium  size  businesses. 
However,  these  three  illustrations,  taken  from 
actual  business  books,  show  a  considerable  variation 
in  their  overhead  expense,  and  a  still  wider  dis- 
crepancy in  the  financial  results,  for  instance  the 
first  shows  the  following  items  of  overhead  expense: 

Salary .  $1375.00 

Rent 300.00 

Light 12.00 

Heat 25.00 

Telephone 60 . 00 

Horse  and  wagon 300 . 00 

Bookkeeper 384 .00 

Insurance    \  inn  no 

Taxes  / 

Cartage       1  10  00 

Carfares      / 

Tools .* 15.00 

Collections 25 .00 

Bad  accounts 100.00 

Driver  (boy  and  owner) 50 . 00 

Waste  material 25 .00 

Replacing  defective  goods 25 . 00 

Labor  lost 25 .00 

Allowances 10.00 

Interest  on  capital 90 . 00 

Postage : 25.00 

Stationery  and  printing 25 . 00 

Association  dues .  .  14 . 00 


Total $2995.00 

Inquiry  elicited  the  fact  that  absolutely  ac- 
curate accounts  were  not  kept,  that  is  they  were  not 
kept  separately.  The  figures,  however,  are  vouched 
for  as  being  within  a  few  dollars,  having  been 
picked  out  of  the  general  account,  no  attention  being 
paid  to  the  odd  cents. 


PERCENTAGE  METHODS  97 

Total  amount  of  business  done $14,500.00 

Amount  of  overhead  expense 2,995 . 00 

Percentage  of  overhead  expense  on  busi- 
ness done 20 . 65 

Productive  labor 4,600.00 

Percentage  of  overhead  expense  on  pro- 
ductive labor 65 . 11 

Productive  labor $4,600.00 

Merchandise 7,500.00 


First  cost $^2,100. 00 

Percentage  of  overhead  expense  on  first 

cost 24.75 

First  cost $12,100.00 

Overhead  expense 2,995 . 00 


Total  cost $15,095.00 

Business  done 14,500.00 

Net  loss $595 .00  or  4.1% 

When  the  owner 's  attention  was  called  to  this 
showing  he  was  astonished.  It  surely  is  now  up  to 
him  to  ask  a  better  margin  of  profit  for  his  work. 
His  overhead  expenses  are  below  the  average,  the 
various  items  making  up  the  schedule  are  about  as 
low  as  they  can  be  bought  for,  but  the  man  has  been 
selling  his  work  entirely  too  cheap. 

Case  No.  5  is  that  of  a  medium-sized  business  in 
a  medium-sized  city,  the  proprietor  of  which  is  a 
thorough  mechanic,  being  a  graduate  of  the  New 
York  Trade  School.  He  also  has  had  the  teaching 
of  adversity  and  experience  in  business  life.  He 
took  over  his  business  from  a  relative  when  it  was 
virtually  bankrupt  and  has  put  it  on  a  paying 
basis,  the  result  showing  that  he  must  have  added 
on  the  average  31.2%  to  the  gross  cost  in  order  to 
have  cleared  a  net  profit  of  5.3%.  I  understand 
that  this  man  aims  to  obtain  50%  over  gross  cost 


98 


OVERHEAD  EXPENSE 


and  probably  some  of  the  competition  contract 
work,  where  he  had  to  meet  other  men's  figures 
brought  the  net  percentage  down.  The  figures 
given  by  him  are  as  follows : 

Salary $1300.00 

Rent 360.00 

k^   \  72  00 


Heat    J  
Telephone 
Bookkeeper 
Postage 
Stationery  and 
printing 
Horse  and  wagor 
Cartage  and  drrv 
Insurance  

Office       ] 
expense     \    

523.00 

account    J 

\ 

470  00 

er   / 

100.00 

Tools  

34.00 

Collections 
Bad  accounts 
Waste  material 
Replacing  defect 
goods 
Labor  lost 
Allowances 
Interest 
Association  dues 
Advertising 

ive   1  General    1 
j  expense     r  •  •  • 

658.00 

account    J 

31.00 

51  00 

Total $3599.00 

Note. — The  grouping  of  items  is  due  to  the 
manner  of  accounting  in  vogue  in  this  business. 
Here  also  the  pennies  were  eliminated  to  make  the 
figuring  easier. 

Amount  of  business  done $17,000 . 00 

Amount  of  overhead  expense 3,599.00 

Percentage  of  overhead  expense  on  busi- 
ness done . 21 . 17 

Productive  labor «. 4,500 . 00 

Percentage  of  overhead  expense  on  pro- 
ductive labor 79 .97 


PEECENTAGE  METHODS  99 

Productive  labor $4,500 . 00 

Merchandise 8,000.00 


First  cost $12,500.00 

Percentage  of  overhead  expense  on  first 

cost 28.79 

First  cost $12,500.00 

Overhead  expense 3,599 .00 


Net  cost $16,099.00 

Amount  of  business  done ....    17,000 . 00 

Net  profit $901. 00  or  5.3% 

These  figures  show  a  paying  business  run  with 
every  care  as  to  the  overhead  expense  and  with  no 
extravagant  salary  list,  still  the  percentage  of  over- 
head expense  is  higher  on  all  points  than  that  of  the 
previous  case,  while  the  amount  paid  out  for  pro- 
ductive labor  is  a  little  lower  and  the  merchandise 
account  a  little  higher,  the  evident  cause  of  the 
difference  in  net  results  being  the  difference  in  the 
amount  of  profit  added  and  obtained. 

Another  case  is  that  of  a  brother  partnership, 
where  a  stove  and  tinware  store  is  run  in  conjunc- 
tion with  a  plumbing  shop.  The  charges  on  over- 
head expense  are  estimated  on  percentage  of  ser- 
vices rendered,  the  rent  on  comparative  floor  space 
occupied.  The  salary  is  that  of  one  brother  who 
has  entire  charge  of  the  plumbing  department  less 
the  time  charged  to  jobs  direct.  This  is  interesting, 
as  many  plumbers,  especially  in  small  towns,  have 
similar  combinations,  the  claim  often  being  made 
that  by  this  method  they  keep  down  their  overhead 
expenses.  The  comparison  of  results  does  not  bear 


100  OVERHEAD  EXPENSE 

out  this  claim,  just  as  in  cases  Nos.  1,  2  and  3,  we 
find  a  refutation  of  the  claim  that  a  man  doing  all 
his  own  work,  bookkeeping,  etc.,  has  little  or  no 
overhead  expense. 

The  actual  figures  show  that  while  the  actual 
cost  of  doing  business  is  lower,  the  percentage  it 
bears  toward  the  other  factors,  namely,  business 
done,  productive  labor  and  net  cost  is  often  higher. 
The  question  hinges  entirely  on  the  amount  or 
percentage  of  profit  that  is  added  to  the  net  cost, 
taking  into  consideration  the  overhead  expense  and 
the  amount  of  business  done. 

Salary $1476.80 

Rent  (%) 312.50 

Gas  (%) 13.36 

Heat  (Yd 25.00 

Telephone  (Yd 58. CO 

Auto,  horse  and  wagon  (Yd 210.00 

Bookkeeper  (Yd 403 .00 

Insurance  (l/£) 31 . 27 

Taxes  (Yz) 87 .50 

Cartage  (Yd 6.00 

Carfares  (M) 113.00 

Tools  (on  shop) 100.00 

Collections  (%) 35 .00 

Bad  accounts  (on  shop) 20 . 00 

Drivers  (Yd 300.00 

Waste  material  (on  shop) 26 . 00 

Replacing  defective  goods  (on  shop) 52 . 00 

Labor  lost  (on  shop) 78 . 00 

Allowances  (on  shop) 72 . 00 

Interest  (on  shop)  tools  and  merchandise .  208 . 00 

Postage  (%) 40.62 

Stationery  and  printing  (Yd 29 . 67 

Association  dues 40 . 00 

Advertising  (Yd  •  •  •  • 81 .26 


Total $3818.1 


PEKCENTAGE  METEORS  •  101 

Amount  of  business  done $14,960.88 

Amount  of  overhead  expense 3,818.98 

Percentage  of  overhead  expense  on  busi- 
ness done 25 . 52 

Productive  labor 4,350.00 

Percentage  of  overhead  expense  on  pro- 
ductive labor 87 . 79 

Productive  labor $4,350.00 

Merchandise 7,684.00 

First  cost $12,034.00 

Percentage  of  overhead  expense  on  first 

cost 31.79 

First  cost $12,034.00 

Overhead  expense 3,818.00 

Net  cost $15,852.98 

Amount  of  business 14,960 . 88 

Net  loss $892.10  or  5.98% 

On  these  results  being  brought  to  the  attention 
of  the  proprietors,  they  informed  me  that  last  year 
was  an  off  year  with  them  on  the  shop  end  of  the 
business,  that  their  business  during  the  five  years 
preceding  had  run  several  thousand  dollars  higher, 
one  year  showing  as  high  as  $20,000.00  worth  of 
business  done,  with  the  same  fixed  charges  and 
only  a  few  hundred  dollars  more  on  the  productive 
labor  and  merchandise  accounts. 

We  have,  therefore,  in  this  case  an  example  of  too 
much  plant — stock,  office  and  tools — for  the  amount 
of  business  done  last  year,  or  it  may  be  that  the 
owners  took  some  contracts  during  last  year  at  too 
close  a  price.  The  fact  that  their  productive  labor 
and  merchandise  accounts  were  only  a  few  hundred 
dollars  higher,  while  the  total  amount  of  business 
done  was  thousands  higher  in  previous  years,  leads 
me  to  designate  this  as  being  the  "  nigger  in  the 
wood  pile." 


102  -OVERHEAD  EXPENSE 

A  business  showing  results  which  are  much  more 
encouraging  is  taken  as  the  next  example.  It  is 
evident  that  the  owner  knows  how  to  run  his 
business  and  there  is  food  for  thought  in  the  dif- 
ference of  the  final  showing  with  that  of  the  other 
cases  already  considered.  The  figures  follow: 

Detail  of  Overhead  Expense. 

Salary $2000.00 

Rent 196.00 

Light 12.00 

Heat 20.00 

Telephone 80.00 

Horse  and  wagon 200.00 

Bookkeeper 416 .00 

Insurance 88 .00 

Taxes 10.00 

Cartage 5 .00 

Carfares 10.00 

Bad  accounts 50.00 

Driver 520.00 

Waste  material 15 .00 

Labor  lost 20.00 

Replacing  defective  goods 15 .00 

Allowances .... 

Interest  on  capital 90 . 00 

Postage 25.00 

Stationery  and  printing 70 . 00 

Association  dues 16 . 00 

Donations.  .  15.00 


Total $3873.00 

Amount  of  business  done $14,990.00 

Amount  of  overhead  expense 3,873 . 00 

Percentage  of  overhead  expense  on  busi- 
ness done 25 . 81 

Productive  labor 4,428 .00 

Percentage  of  overhead  expense  on  pro- 
ductive labor 87 .48 

Productive  labor $4,428.00 

Merchandise 4,630.00 

First  cost $9,058 .00 


PERCENTAGE  METHODS  103 

Percentage  of  overhead  ex- 
pense on  first  cost $49 . 98 

First  cost $9,058.00 

Overhead  expense 3,873 .00 

Net  cost $12,931.00 

Net  profit $2059 . 00  =  13 . 73  per  cent,  of  business 

Summary. 

Overhead  expense 25.81%  $3,873.00 

Labor 29.54%  4,428.00 

Merchandise 30.88%  4,630.00 

Profit 13.73%  2,059.00 

99.96%     $14,990.00 

The  fact  that  in  these  cases  the  amounts  charge- 
able to  productive  labor  a^nd  tp  merchandise  are  so 
near  alike,  while  the  results  are  so  different  leads 
me  to  present  them  for  comparison.  The  conclud- 
ing instalment  of  this  study  will  present  four  cases 
of  what  may  be  termed  large  businesses  and  a  com- 
parison of  the  three  classes  of  plumbing  businesses 
investigated. 

The  four  cases  hereinafter  discussed  are  such  as 
come  under  the  category  of  large  business.  The 
first  thing  that  attracts  attention  is  that  the  over- 
head cost  of  doing  business  is  much  lower  than  in 
those  businesses  previously  considered.  The  per- 
centage of  net  profit  shown  is  also  lower  excepting 
in  case  No.  10,  where  it  is  higher  than  those  in  the 
small  business  and  medium  business  class.  Case 
No.  8  is  that  of  a  mixed  business,  about  one-half 
being  new  construction  and  one-half  reported  as 
being  high-class  jobbing,  father  and  son  being 
partnership  proprietors. 


104  OVEEHEAD  EXPENSE 


Details  of  Expense  Accounts. 

Salary — owner  and  son $3,800 . 00 

Rent — shop  and  stable 1,300.00 

Light 46.00 

Heat  (included  in  rent) .... 

Telephones 96 .00 

Horse,  wagon  and  autos 1,420.00 

Bookkeeper  and  assistants 2,300 . 00 

Insurance — fire,  vehicle  and  liability 380.00 

Cartage .... 

Carfares 30 . 00 

Taxes  and  licenses 60 . 00 

Tools  and  machinery 300 . 00 

Collections  and  legal  expense 150 . 00 

Bad  accounts 400 . 00 

Allowances 150.00 

Drivers  and  stableman 1,320.00 

Waste  material 50.00 

Replacing  defective  goods 150 . 00 

Interest  on  capital  and  commercial 180.00 

Postage 45.00 

Stationery  and  printing 75 . 00 

Association  dues 24 . 00 

Incidentals  (general  expense) 150 . 00 


$12,426.00 

Synopsis  of  the  Year's  Business. 

Amount  of  business  done $72,130.00 

Amount  of  overhead  expense 12,426.00 

Percentage  of  overhead  expense  on  busi- 
ness done 17 . 22 

Productive  labor 26,043 . 00 

Percentage  of  overhead  expense  on  pro- 
ductive labor 47 . 71 

Merchandise 30,601 . 00 

First  cost 56,644.00 

Percentage  of  overhead  expense  on  first 

cost 21 . 93 

Amount  of  business  done 72,130.00 

Net  cost 69,070.00 

Net  profit $3,060.00 

Percentage  of  net  profit  on  business  done .  4 . 24 


PERCENTAGE  METHODS  105 

Case  No.  9  is  that  of  a  business  in  a  large  city  in 
the  Middle  West.  The  business  on  the  death  of  the 
original  owner  was  incorporated  by  the  son  and  an 
old  employee,  the  son  acting  as  general  manager  and 
office  head,  the  erstwhile  employee  acting  as  super- 
intendent, having  charge  of  the  mechanical  and 
outside  end.  The  year  the  report  is  on  showed 
about  90%  new  construction  work  and  10%  repair 
work.  The  overhead  expense  schedule  shows  the 
following : 

Schedule  of  Overhead  Costs. 

Salary  of  manager $2,500.00 

Salary  of  superintendent 2,300 . 00 

Light 
Heat 
Telephone 


Bookkeeper 
Postage 
Stationery  and 

printing 
Horses  and  wagons 
Cartage 
Carfares 


Office  expense 2,910 . 00 


General  expense . .      3,876 . 00 


Tools 
Driver 

Rent ' 1,300.00 

Insurance 450 .00 

Taxes 
Collections 
Licenses 
Replacing  defective 


goods 
Allowances 
Association  dues 
Interest  on 

notes 


)>  Special  expense. .  .      2,420 . 00 


Carryforward $15,756. 00 


106  OVEEHEAD  EXPENSE 

Brought  forward $15,756.00 

Bad  accounts  (profit  and  loss  charge) . . .  240 . 00 

Waste  material— estimated 250.00 

Labor  lost— estimated 100.00 

Interest    on    capital    (3    per    cent,    on 

$5,000.00) 150.00 

Depreciation  (profit  and  loss  charge) 500.00 


Total $16,966.00 

Synopsis  of  Business. 

Amount  of  business  done $98,560.00 

Amount  of  overhead  expense 16,996 . 00 

Percentage  of  overhead  expense  on  busi- 
ness done 17 . 24 

Amount  paid  out  for  productive  labor. .  38,465.00 
Percentage  of  overhead  expense  on  pro- 
ductive labor 44 . 18 

Merchandise 41,300.00 

First  cost 79,765 .00 

Percentage  of  overhead  expense  on  first 

cost 21.30 

Amount  of  business 98,560 . 00 

Net  cost 96,761 .00 


Net  profit $1,799.00 

Percentage  of  net  profit  on  business  done .  1 . 82 

Case  No.  10  shows  the  best  net  results  of  this 
series.  It  is  the  record  of  a  large  jobbing  and 
overhauling  business,  absolutely  no  new  construc- 
tion work  having  been  done  during  the  year  re- 
ported on,  which  was  1912.  The  schedule  is  as 
follows: 


PERCENTAGE  METHODS  107 


Details  of  Cost  Accounts. 

Salaries  of  management $1,820.00 

Rent 1,200.00 

Light 14.60 

Heat 52.00 

Telephone.  . 100.00 

Horse,  wagon  and  auto 859 . 82 

Bookkeepers 919.50 

Insurance  (including  liability) 345 . 83 

Taxes  (City,  State  and  Federal) Ill  .40 

Cartage 2.00 

Carfares 250.00 

Tools  (replacement  and  depreciation) . . .  413 . 57 

Collections .... 

Bad  accounts 178.30 

Driver 728.00 

Waste  material  (estimated) 150.00 

Replacing  defective  goods  50 . 00 

Labor  lost  (estimated) 200.00 

Allowances  and  discounts 502 . 99 

Interest  on  capital,  3  per  cent,  on 

$5,000.00  estimated 150.00 

Postage 144.95 

Stationery  and  printing 94 . 82 

Association  dues 24 . 00 

Advertising,  charities,  license  fees  and 

petty  repairs  to  vehicles 298 . 55 

Total $8,610.33 

Synopsis  of  Business  for  1912. 

Amount  of  business  done $54,037 .47 

Amount  of  overhead  expense 8,610.33 

Percentage  of  overhead  expense  on  busi- 
ness done 15 . 93 

Amount  of  productive  labor 17,494.26 

Percentage  of  overhead  expense  on  pro- 
ductive labor 49 .22 

First  cost 36,113.44 

Percentage  of  overhead  expense  on  first 

cost 23.84 

Merchandise 18,619 . 18 

Amount  of  business  done 54,037 . 47 

Net  cost 44,723.77 

Net  profit 9,313.70 

Percentage  of  profit  on  business  done. . .  17 .23 


108  OVEEHEAD  EXPENSE 

This  case  No.  10  proves  up  like  this: 

Overhead  expense 15.93%  $8,610.33 

Merchandise 34.45%  18,619. 18 

Labor 32.37%  17,494.26 

Profit 17.23%  9,313.70 

Year's  business 99 . 98%         $54,033 . 47 

The  apparent  loss  of  0.02  of  1%  in  the  proof 
comes  through  not  having  carried  the  calculations 
of  percentage  beyond  two  decimal  points.  Had 
they  been  carried  to  their  ultimate  conclusion  the 
0.02  of  1%  would  have  been  made  up.  The  man- 
aging proprietor  in  this  case  is  one  of  those  abso- 
lutely honest,  hard-working  individuals  of  which  the 
craft  has  so  many.  That  his  results  are  quite  above 
the  average,  both  as  regards  amount  of  business 
and  financial  returns,  is  entirely  due  to  individual 
competency,  and  to  the  fact  that  he  knows  how  to 
do  business  as  well  as  how  to  do  plumbing  work. 
In  the  next  and  final  installment  will  be  shown  a 
comparative  table  of  the  different  businesses  dis- 
cussed. 


CHAPTER  VI. 
COMPARATIVE  OVERHEAD  EXPENSE  STATEMENTS. 

In  tabulating  the  experiences  that  have  been 
used  for  these  articles  cases  No.  1  to  8  and  No.  10 
are  presented  inclusive  and  No.  9  separately,  as 
having  6  years'  experience  to  hand  on  the  last  case, 
affords  opportunity  for  information  of  a  character 
not  disclosed  in  the  other  cases. 

The  first  thing  that  attracts  attention  is  the 
fact  that  there  does  not  seem  to  be  any  co-relation 
between  overhead  expense  percentage  and  profit 
percentage.  Case  No.  1  with  25.4%  overhead 
expense  shows  4.09%  profit,  No.  6  with  25.52% 
overhead  expense  shows  5.96%  loss  and  case  No.  7 
with  25.83%  overhead  expense  shows  13.73%  profit. 
Case  No.  2  with  17.65%  overhead  expense  shows 
2.77%  loss,  and  No.  8  with  17.24%  overhead  ex- 
pense shows  4.24%  profit.  It  appears  from  this 
that  the  influence  of  overhead  expense  on  profit  is 
not  empirical. 

The  next  proposition  appearing  is  the  apparent 
fact  that  overhead  expense  varies  considerably  in 
accordance  with  the  character  of  business  and  that 
the  dominating  factor  influencing  overhead  expense 
and  all  other  percentages,  in  fact,  governing  even 
the  total  amount  of  business  done,  is  designated  in 
line  No.  10,  viz.,  percentage  added  to  first  cost, 
first  cost  being  merchandise  cost  plus  productive 
labor. 

109 


110  OVEEHEAD  EXPENSE 


For  instance,  case  No.  4  shows: 

Amount  of  business $14,500.00 

First  cost 12,100.00 

Percentage  overhead  expense  on  business.          20 . 65 

Percentage  loss  on  business 4.1 

Percentage  added  to  first  cost 19 . 83 

Now  if  36%  had  been  added  to  first  cost,  the  re- 
sult would  have  been  as  follows: 

First  cost $12,100.00 

36  per  cent 4,356.00 

Amount  of  business $16,456 .00 

Total 15,095.00 

Profit $1,361 .00 

Amount  business $16,456.00 

First  cost 12,100.00 

Percentage  overhead  expense  on  business.  18.2 

Percentage  profit  on  business 8.27 

Percentage  added  to  first  cost 36 . 00 

On  the  other  hand,  case  No.  5  now  shows: 

Amount  business $17,000 . 00 

First  cost 12,500.00 

Percentage  overhead  expense  on  business.          21.17 

Percentage  profit  on  business 5 . 30    . 

Percentage  added  to  first  cost 36 . 00 

Had  the  owner  added  only  20%  to  first  cost  the 
result  would  have  been  as  follows: 

First  cost $12,500. 00 

20  per  cent 2,500. 00 

Amount  business $15,000 . 00 

Total  cost 16,099.00 


Loss.  . $1,099.00 

Amount  business $15,000.00 

First  cost 12,500.00 

Percentage  overhead  expense  on  business .  23 . 99 

Percentage  loss  on  business 7 . 32 

Percentage  added  to  gross  cost 20 . 00 


PEECENTAGE  METHODS  111 

The  percentage  as  per  lines  No.  12  and  13  would 
change  accordingly.  Those  of  lines  No.  1.6,  17 
and  18  would  remain  as  they  are. 

I  have  used  cases  No.  4  and  5  for  this  compari- 
son because  the  stable  or  least  variable  factors 
(merchandise  and  productive  labor  comprising  the 
first  cost)  are  practically  the  same,  being  $12,100.00 
in  case  No.  4  and  $12,500.00  in  case  No.  5.  The 
variant  or  more  controllable  factor,  namely,  per- 
centage added  to  gross  cost,  is  the  one  factor  that 
turns  profit  into  loss  or  loss  into  profit.  The  amount 
(not  percentage)  of  overhead  expense  is  governed 
by  local  circumstances,  by  character  of  business, 
by  the  personality  of  the  proprietor  and  by  firmly 
established  business  conditions.  We  find  in  these 
cases  that,  for  instance  in  case  No.  4,  $12,100.00 
worth  of  labor  and  material  carried  $2995.00  of 
overhead  expense,  while  in  case  No.  5,  $12,500.00 
worth  of  labor  and  material  carried  $3599.00  of 
overhead  expense,  a  difference  of  $400.00  in  first  cost 
carrying  a  difference  of  $604.00  of  overhead  expense. 

All  this  shows  us  that  it  is  not  safe  for  any  man 
to  estimate  on  any  computed  average  of  overhead 
expense.  It  is  absolutely  necessary  that  we  find 
out  each  year  what  our  actual  overhead  expense 
is  and  govern  ourselves  accordingly.  For  those 
who  have  no  experience  to  guide  them,  we  can  only 
say  that  for  businesses  below  $10,000.00  the  average 
expense  shows  upward  of  25%.  Between  $10,000.00 
and  $25,000.00  the  averages  run  between  20  and 
25%,  while  above  $25,000  they  run  from  13  to  20%. 


112 


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114  OVEEHEAD  EXPENSE 

Lines  No.  3  and  4  also  show  a  wide  discrepancy, 
no  hard  and  fast  rules  being  deducible  therefrom 
further  than  this  general  fact,  that  according  as  job 
work  or  new  construction  work  dominate  in  any 
shop,  so  will  labor  or  merchandise  be  the  larger 
factor. 

Lines  No.  11,  16,  17  and  18  show  the  different 
percentages  that  must  be  provided  for  accordingly 
as  one  wishes  to  load  his  overhead  expense  on  any 
one  or  another  item  composing  the  total  business  or 
on  the  total  business  itself.  To  take  up  the  ad- 
vantages or  disadvantages  of  these  various  methods 
would  need  a  separate  treatise.  So  long  as  the 
overhead  expense  is  provided  for,  that  is  the  im- 
portant matter. 

The  governing  facts  as  to  loading  the  0.  H.  X. 
on  different  items  are  fairly  covered  in  the  question 
and  answer  section  of  this  book. 

Look  now  at  case  No.  9  covering  four  years  of 
business  experience. 

All  that  has  been  said  of  the  tabulation  is  empha- 
sized in  this  showing.  The  domination  of  line 
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personality  remains  the  same.  It  shows  plainly 
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expansion.  It  might  be  noted  in  passing  that  the 
desire  on  the  part  of  the  firm  to  gobble  a  very  large 
share  of  the  work  in  that  town  resulted  in  a  con- 
traction in  business  on  the  part  of  the  other  five 
firms  in  the  town.  In  order  to  get  their  share  of 
the  work  they  also  started  to  cut.  The  result  is 


PERCENTAGE  METHODS 


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116  OVEEHEAD  EXPENSE 

shown  in  the  1912  business.  Each  year  our 
friends  cut  down  the  percentage  added  to  the 
first  cost  in  order  to  get  more  business.  The 
other  fellows  also  cut.  Our  friends  had  to  cut  still 
more  until  in  1912  they  came  perilously  near  to 
getting  into  the  "loss"  class.  It  will  be  very  hard 
for  them  to  get  back  to  the  standard  of  business 
enjoyed  in  1909.  In  other  words,  they  have  de- 
moralized the  business  in  that  town  for  themselves 
and  all  others  for  some  time  to  come. 

The  foregoing  shows  one  of  the  results  of  ex- 
pansion by  taking  a  large  amount  of  business  at  a 
very  close  margin  on  the  theory  that  the  larger  the 
business  the  smaller  the  overhead  expense  and 
consequently  the  larger  the  profit  must  be.  The 
year  after  the  death  of  the  original  owner  this  firm 
did  only  $53,000.00  worth  of  business,  with  a  24.84% 
overhead  expense  and  cleared  a  profit  of  9.12%. 
The  new  owners  felt  that  it  was  up  to  them  to  ex- 
pand, as  the  manager  expressed  himself,  it  was  up 
to  him  to  make  good.  He  figured  that  they  could 
do  a  great  deal  larger  business  with  their  existing 
plant  without  increasing  their  fixed  charges.  There- 
fore, their  overhead  expense  percentage  would  be 
lower,  and  consequently  they  could  take  work  at  a 
considerably  lower  price  and  still  make  a  larger  per- 
centage of  profit. 

The  following  year  showed  $70,864.00  worth  of 
business  with  20.27%  of  overhead  and  5.32%  of 
profit.  This  was  not  the  result  anticipated.  How- 
ever, he  felt  that  he  was  right  in  principle  and  de- 
cided to  expand  some  more.  The  following  year 


PERCENTAGE  METHODS  117 

showed  $129,452.00  worth  of  business,  with  13.72% 
of  overhead  expense /and  7.65%  of  profit.  During 
this  year  the  flexible  items  of  the  overhead  expense 
had  risen  on  account  of  the  rising  volume  of  busi- 
ness, for,  whereas,  in  1909  the  total  amount  of 
overhead  expense  had  been  $13,761.00,  in  1911  it 
was  $17,760.00,  an  increase  of  $4000.00  The  fol- 
lowing year  he  felt  that  they  were  carrying  too  large 
a  volume  of  commercial  paper  and  too  large  an 
outstanding  account,  and  found  it  necessary  to  pull 
in  a  little.  He  tried  to  get  a  little  better  price  for 
their  work  in  1912  and  consequently  obtained  less 
work.  The  plant,  being  expanded,  was  conse- 
quently a  little  topheavy.  Prices  were  again 
pinched  in  an  effort  to  catch  up,  and  1912  conse- 
quently showed  $98,560.00  worth  of  business,  with 
a  17.24%  overhead  and  1.82%  profit. 

It  was  in  January  1913  that  I  received  the  state- 
ment of  their  business  1909-1912.  When  I  had 
worked  out  their  percentages  and  cards  for  each 
year  and  they  compared  one  year  with  the  other 
they  came  to  the  conclusion  that  to  continue  on 
along  the  same  lines  could  mean  only  one  thing,  and 
that  was  ultimate  failure. 

They  immediately  agreed  to  reduce  the  salary  of 
management.  The  amount  thus  saved  was  in- 
vested in  advertising,  a  thing  they  had  never  in- 
dulged in  before,  and  decided  that  they  must  ob- 
tain better  prices  rather  than  more  work.  In 
short  look  for  and  go  after  quality  business  rather 
than  quantity.  There  were  a  number  of  cheap 


118  OVERHEAD  EXPENSE 

contracts  unfinished  which  kept  down  the  net  re- 
sults for  1913.  However,  an  improvement  was 
shown  for  that  year  as  with  $16,000.00  less  of 
business  their  results  were  approximately  %% 
better  on  the  net  profit  although  the  overhead  went 
up  2%%. 

In  1914  having  completed  the  cheap  work  on 
hand  the  previous  year  their  showing  is  still  better 
as  the  net  profit  jumped  up  to  4.18%  as  against 
1.82%  in  1912  while  their  overhead  was  about  the 
same  as  in  1913. 

The  last  column  is  added  to  show  the  vagaries  of 
averages.  The  average  of  line  No.  1  is  most  closely 
approached  in  1914.  That  of  line  No.  2  in  1913. 
That  of  line  No.  3  in  1913.  That  of  line  No.  4  in 
1913.  That  of  line  No.  5  is  not  approximated  in 
any  year  of  the  six.  Line  No.  7  finds  its  approxima- 
tion in  1909  and  1910  and  so  on. 

Again  it  might  be  said  that  the  law  of  averages 
is  of  use  only  for  those  who  have  no  personal  ex- 
perience to  guide  them.  Each  year  brings  its  own 
problems  and  each  year  will  demand  different  treat- 
ment according  to  local  conditions,  according  to 
personal  financial  conditions,  and  according  to  the 
size  of  the  plant  and  the  character  of  the  work. 

How  very  important  then  does  it  appear  to  be 
that  we  should  know  each  year  what  our  overhead 
expense  has  been,  what  our  year's  business  has 
brought  forth  in  the  line  of  net  profit  or  loss.  With- 
out this  knowledge  we  are  only  guessing. 

Very  interesting  is  the  comparative  schedule  of 
overhead  expense  (see  page  119). 


PEECENTAGE  METHODS 


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120  OVEEHBAD  EXPENSE 

These  figures  when  compared  with  the  business 
analysis  covering  the  same  term  tend  to  show  the 
reason  for  the  fluctuation  of  amount  of  O.  H.  X. 
with  the  changing  amount  of  business.  That 
although  the  overhead  percentage  usually  lowers 
as  business  increases,  the  actual  amount  of  over- 
head rises,  although  not  in  the  same  ratio.  The 
various  items  grouped  under  the  heading  of  rent, 
require  some  explanation. 

The  property  is  owned  by  the  firm.  Part  thereof 
is  rented  out  so  their  rent  charges  consist  of  interest 
on  valuation  plus  taxes  and  upkeep,  minus  rents 
received.  In  1913  they  decided  that  they  could  get 
along  with  less  room  and  let  out  additional  store 
space,  thus  bringing  down  their  own  rent.  The 
progressive  rise  from  1909  to  1912  was  partly  due 
to  rise  in  valuation  which  of  course  made  the  in- 
terest charges  progressively  higher.  The  general 
expense  item  does  not  show  the  decline  in  1913  and 
1914  that  it  should  because  the  insurance  item  which 
in  1909  to  1912  had  been  reported  separately  was 
in  the  later  years  included  in  general  expense.  The 
special  expense  account  shows  fluctuations  in 
unison  with  the  rise  and  fall  of  total  amount  of 
business.  When  the  firm's  attention  was  called 
to  this  fact  they  laid  the  cause  on  two  items  prin- 
cipally; namely,  replacements  and  the  cost  of  carry- 
ing commercial  paper.  When  the  fact  was  pointed 
out  that  it  is  usual,  that  the  maker  pays  the  interest 
on  commercial  paper;  the  answer  was,  "Yes,  but 
how  is  it  when  you  have  to  issue  the  paper  yourself 
to  carry  the  volume  of  business"?  The  profit  and 


PERCENTAGE  METHODS  121 

loss  line  looks  very  erratic.  It  follows  a  course  all 
its  own  without  any  reference  to  any  other  factor. 
Bad  accounts  were  unusually  high  during  the  be- 
ginning of  the  term.  Evidently  the  management 
learned  to  be  cautious  by  this  experience  as  the 
later  years  show  only  about  Ji  of  1%  which  is  quite 
low. 

Waste  material  and  labor  lost  were  estimated 
excepting  in  1914  during  which  year  close  watch 
was  kept  on  the  latter  item.  The  manager  informs 
me  that  as  a  result  he  is  quite  sure  that  this  item 
had  been  under  estimated  in  former  years.  In- 
terest on  capital  invested  was  on  an  estimated  in- 
vestment. This  does  not  fluctuate  for  the  reason 
that  interest  on  commercial  paper  to  carry  an 
expanded  credit  was  charged  under  special  expense. 
Depreciation  is  estimated  also  on  an  estimated  in- 
vestment. In  this  method  of  accounting  it  evidently 
is  meant  to  balance  in  a  way  the  appreciation  due  to 
renewals  and  additions  to  tools,  vehicles,  fixtures  and 
furnishings. 

The  special  advertising  was  done  in  the  daily 
paper  of  the  town  and  in  the  weekly  of  the  neighbor- 
ing county  seat,  a  good  size  advertisement  for 
quality  work  being  run  at  intervals  of  two  or  three 
issues. 

The  gentlemen  claim  good  results  although  not 
up  to  expectations.  This  is  of  course  problematic 
as  it  is  not  an  easy  matter  to  trace  results  directly 
to  advertising. 

I  would  caution  the  reader  that  his  personal 
experience  may  differ  considerably  from  that  pre- 


122  OVEEHEAD  EXPENSE 

sented.  But — present  it,  as  an  actual  experience 
which  for  that  reason  has  great  value  as  showing 
us  what  may  be  expected  under  similar  circum- 
stances. 

Very  interesting,  however,  is  the  application  of 
the  information  deduced  from  the  various  fore- 
going tables  when  applied  to  general  business 
conditions. 

Of  122  shops  reporting  for  the  term  July  4,  1911, 
to  July  4,  1912: 

Four  report  between  $2000.00  and  $5000.00 
worth  of  business. 

Sixteen  report  between  $6000.00  and  $10,000.00 
worth  of  business. 

Thirty-seven  report  between  $10,000.00  and 
$20,000.00  worth  of  business. 

Twenty  report  between  $20,000.00  and  $30,000.00 
worth  of  business. 

Fourteen  report  between  $30,000.00  and 
$40,000.00  worth  of  business. 

Four  report  between  $40,000.00  and  $50,000.00 
worth  of  business. 

Ten  report  between  $50,000.00  and  $75,000.00 
worth  of  business. 

Eleven  report  between  $75,000.00  and  $100,000.00 
worth  of  business. 

Six  report  over  $100,000.00  worth  of  business. 

If  this  average  holds  good  throughout  the  trade 
(and  we  have  no  reason  to  think  otherwise)  the  large 
majority  of  plumbing  businesses  are  about  $18,000.00 
in  size.  The  average  overhead  expense,  according 
to  the  cases  reported,  in  a  business  of  this  size  is 


PEECENTAGE  METHODS  123 

from  20  to  25%  and  as  of  these  the  numerical  pre- 
ponderance is  between  $10,000.00  and  $20,000.00, 
the  average  overhead  expense  can  safely  be  stated 
as  being  nearer  25  than  20%.  For  businesses 
below  $10,000.00  all  indications  point  to  an  average 
of  about  23  to  30%.  So  we  estimate  that  75% 
or  three-quarters  of  the  plumbers  are  carrying  an 
overhead  expense  of  about  25%.  The  other 
25%,  or  one-quarter,  run  down  from  20  to  13% 
overhead  expense,  according  to  the  amount  and 
character  of  the  business  done. 

Nowhere  do  we  find  any  justification  for  adding 
10%  or  15%  to  first  cost  (labor  and  material)  with 
the  expectation  of  showing  a  net  profit.  It  just  can't 
be  done. 


CHAPTER  VII. 
THE  VALUE  OF  ANNUAL  SYNOPSIS  OF  BUSINESS. 

A  few  days  after  lecturing  in  a  certain  city  I 
received  by  mail  a  statement  with  the  request  to 
work  out  a  synopsis  for  the  proprietor. 

SYNOPSIS  FOR  1913. 

Amount  of  business $24,760 . 00 

Amount  overhead  expense 4,201 .00 

Amount  productive  labor 5,851.00 

Amount  merchandise 10,683 . 00 

Gross  or  first  cost 16,534.00 

Net  or  final  cost 20,735.00 

Net  profit 4,025.00 

Amount  business  less  gross  cost 8,226 . 00 

Percentage  added  to  gross  cost 49 . 69 

Percentage  O.  H.  X.  of  business 16.96 

Percentage  merchandise  of  business ....  43 . 14 

Percentage  labor  of  business 23 . 63 

Percentage  profit  of  business 16.21 

Percentage  O.  H.  X.  estimated  on  labor.  71 .83 
Percentage  O.  H.  X.  estimated  on  mer- 
chandise   39.32 

Percentage  O.  H.  X.  estimated  on  gross 

cost 25.40 

THE  PROOF. 

O.  H.  X.  =16.96%=  $4,199.296 

Labor  =23.63%=  5,850.788 

Merchandise  =43.14%=  10,681.464 

Profit  =16.21%=  4,013.596 


Total  =  99 . 94%  =  $24,745 . 144 

Mathematical  loss  =      .06%=          14.856 


100%       =  $24,760 . 000  amt.  business  1913 
124 


PERCENTAGE  METHODS  125 

This  year  I  received  the  following  letter. 

Feb.  1st,  1915. 
MR.  H.  F.  BAILLET, 
Irvington,  N.  J. 
DEAR  SIR: 

Have  enclosed  a  statement  of  my  last  year's  1914  business. 
Thought  you  might  be  glad  to  compare  it  with  last  statement 
you  figured  up  for  me. 

Am  sorry  to  have  to  send  you  such  a  bum  statement, 
which  does  not  compare  at  all  favorably  with  last  statement. 
Yours  very  truly, 

1914. 
SYNOPSIS. 

Amount  of  business $18,789 . 74 

Amount  O.  H.  X 4,296.95 

Amount  paid  productive  labor 5,542 .32 

Amount  paid  merchandise 8,181 .09 

Gross  cost  labor  and  merchandise ....  13,723 . 41 
Net     cost     labor,     merchandise    and 

O.  H.  X 18,020.36 

Net  profit 769 .38 

Amount  business  less  gross  cost 5,066 . 33 

Percentage  added  to  gross  cost 36  18/100% 

Percentage  O.  H.  X.  of  business 22  87/100% 

Percentage  merchandise  of  business. .  .  43  54/100% 

Percentage  labor  of  business  29  49/100% 

Percentage  profit  of  business 5  60/100% 

Percentage  O.   H.   X.   on   productive 

labor 77  53/100% 

Percentage  O.  H.  X.  on  merchandise.  .  52  52/100% 

Percentage  O.  H.  X.  on  gross  cost 31  31/100% 

To  which  the  following  reply  was  forwarded: 

Feb.  5,  1915. 
MY  DEAR  FRIEND  J. : 

Your  statement  for  1914  to  hand.  Thanks  for  the  con- 
fidence shown.  It  is  a  very  interesting  document  compared 
with  that  of  1913. 

It  shows  first  that  your  opportunities  were  probably  not  as 
good  as  the  previous  year — because  the  gross  cost  namely 
labor  and  merchandise  amounting  to  $16,534.00  in  1913  only 
amounted  to  $13,723.00  in  1914.  However,  that  in  itself 
would  not  have  been  so  much  of  a  slump  had  you  managed  to 
stick  to  the  gross  loading  of  the  former  year.  The  per- 
centage added  to  gross  cost  in  1913  was  49.69%  whereas  in 
1914  it  was  only  36.18%. 


126  OVEEHEAD  EXPENSE 


While  the  amount  of  O.  H.  X.  did  not  vary  materially  the 
percentage  did  jump  from  19.96  to  22.87  due  to  the  fact  of 
less  business,  a  smaller  loading  and  no  paring  of  expenses. 
Nor  do  I  think  that  any  paring  was  called  for,  as  you  are  still 
under  the  average. 

I  presume  that  owing  to  the  general  business  depression 
you  were  in  a  measure  obliged  to  take  work  at  a  lower  margin 
than  had  been  the  case  in  the  previous  year.  However,  it  is 
interesting  to  see  what  would  have  happened  had  you  re- 
ceived the  higher  margin. 

Gross  cost  1914  was $13,723 .00 

Percentage  added  to  gross  cost  1913  was 

50%  =would  be 6,861 .00 

Total  amount  business  would  have  been .  $20,584.00 
Net  cost  1914 18,020.00 


Profit  would  have  been $2,564.00 

Percentage  O.  H.  X.  of  business  would 

have  been 20.87 

Instead  of 22.87 

Percentage  profit  would  have  been 12 . 45 

Instead  of 5.60 

You  can  readily  see  that  the  crux  of  the  situation  is: 
The  percentage  added  to  gross  cost! 

The  evident  fact  is  that  you  have  received  less  business 
and  carried  on  that  less  business  at  lower  prices  in  1914  than 
in  1913  without  any  reduction  in  your  overhead  expense. 

However,  by  using  the  percentage  method  of  synopsis  you 
know  just  exactly  what  you  have  done;  how  and  why  it  hap- 
pened and  can  govern  yourself  accordingly. 

The  business  man  who  does  not  use  this  or  as  true  a  method 
of  synopsis  and  analysis,  while  he  may  know  that  something 
has  hit  him;  does  not,  cannot  know  how  or  why  and  therefore 
will  not  know  what  to  do  to  safeguard  his  business.  He 
blames  it  to  hard  luck  and  does  the  same  thing  over  again. 
How  does  this  strike  you? 

Sincerely,  H.  F.  B. 

Feb.  8,  1915. 
MY  DEAK  MR.  BAILLET: 

Your  favor  of  5th  inst.  at  hand  and  carefully  read.  Much 
obliged  to  you  for  the  exhaustive  study  made,  for  which  I  am 
surely  indebted  to  you. 

My  own  theory  of  conditions  last  year  was  that  I  did  con- 
siderably less  work,  with  the  same  overhead  and  practically 
the  same  labor.  I  knew  that  I  was  wrong  on  my  labor,  as 
I  had  an  expensive  crowd  on.  Had  very  few  helpers  and 


PEECENTAGE  METHODS  127 

practically  no  apprentices.  Kept  my  pay  roll  up.  Work 
was  harder  to  get  last  year  and  is  going  to  be  harder  still 
this  year,  so  having  been  duly  "foe-warned,"  if  caught  again 
by  the  same  hook,  the  fault  will  be  my  own,  hey? 

Very  much  obliged  to  you.  Will  be  glad  to  send  you 
data  a  year  hence,  so  that  you  can  get  an  outline  on  just  how 
bum  the  competition  has  been  here! 

Yours  very  truly, 

This  correspondence  needs  no  further  elucidation. 
It  graphically  explains  the  absolute  necessity  of 
knowing  what  it  costs  you  to  do  business  and  the 
need  of  giving  yourself  a  synopsis  of  your  business 
at  least  yearly,  so  you  may  know  what  you  are 
doing  instead  of  guessing. 


SYNOPSIS  CARDS  USED  IN  THE  INVESTIGATION  AND  RECOM- 
MENDED FOR  FILING. 

SYNOPSIS  OF  BUSINESS  FOR  ONE  YEAR 

FROM TO 

Amount  of  business $ 

Amount  (O.  H.  X.)  overhead  expense 

Amount  paid  out  productive  labor 


Amount  paid  for  merchandise. 
|  Labor . 


Labor } 

I  Merchandise )• 

[O.H.X J 


Gross 

1  Merchandise 

Net 

cost 

Net  profit . 

Net  loss 

Amount  business,  less  gross  cost 

Percentage  added  to  gross  cost 

O.  H.  X.  of  business 

Merchandise  of  business 

Labor  of  business 

Profit  of  business 

Loss  of  business 

O.  H.  X.  estimated  on  productive  labor 

O.  H.  X.  estimated  on  merchandise 

O.  H.  X.  estimated  on  gross  cost 

When  you  add  15%  to  labor  and  material  you  are  losing 
money.  Figure  it  out  for  yourself  and  know  what  you  are 
doing. 


128  OVERHEAD  EXPENSE 

OVERHEAD  EXPENSE  CARDS  USED  IN  THIS  INVESTIGATION  AND 
RECOMMENDED  POR  FILING. 

COMPLIMENTS  OF  MASTER  PLUMBERS' 
ASSOCIATION. 

Fill  this  out  from  your  own  books  and  know  what  it  costs 
you  to  do  business. 

OVERHEAD  EXPENSES. 

Salary $ 

Rent 

Light 

Heat 

Telephone 

Horse  and  wagon : 

Bookkeeper 

Insurance 

Taxes 

Cartage 

Carfares 

Tools 

Collections 

Bad  accounts 

Driver 

Waste  materials 

Replacing  defective  goods 

Labor  lost 

Allowances 

Interest  on  capital,  3  per  cent,  on 

Postage 

Stationery  and  printing 

Association  dues 


Total,  $. 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  TINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  SO  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.OO  ON  THE  SEVENTH  DAY 
OVERDUE. 


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UNIVERSITY  OF  CAUFORNIA  LIBRARY 


